The Free Financial Advisor

You are here: Home / Archives for successful investing

My Experience in Landlording 101, or I’m Not Donald Trump

by 7 Comments

I’ve been renovating my rental property this week and haven’t had enough time to pick a Blog Post of the Week! Instead, you get obscure ramblings from an over-caffeinated blogger….I’ll have a Blog Post of the Week! again next week for you. Have a great weekend!

I Never Wanted To Be A Landlord

When I was an advisor, I’d hear horror stories from my clients with tenants. Early on I learned that I probably didn’t have the stomach for some of the negotiation and strong-arming that it takes to work with tenants. I prefer REITs for my real estate exposure.

But, after my home didn’t sell when we moved to Texas, I realized that I had two choices: short sale or try my hand at tenants. I opted for choice #2. I wasn’t completely green. I’d read extensively about landlord/tenant contracts, strategies and tactics so I could be useful to clients. While “fun” might not be the right word, it’d be educational to try it first hand.

The surprise? I didn’t know how much I’d like it.

I’m no Donald Trump and am still too much of a pushover. I want to be a little more callous with my tenants because they realize they can get away with stuff (and do). An example: my tenant the last three years was late with her rent EVERY MONTH. The good news is that I wrote a $100 late fee into the contract, which she gladly paid EVERY MONTH. I got used to her checks two weeks late and came to enjoy the $1,200 extra income from her.

Lessons Learned From Landlording

Is landlording a word? Probably not (Pages doesn’t think so….), but I’m running with it. That’s the kind of rebel I am.

  1. Don’t rent a furnished place unless you’re okay with everything being ruined OR you write penalties into the contract. None of our furniture matched our new house (of course, that would be made too much sense….), so we left most of the furniture there. My tenant, a school teacher, was excited about getting a home with nice stuff. Imagine my surprise three years later when my sofa, living room chair and desk were all destroyed. She apologized a ton, but no cash exchanged hands.
  2. Bolster your reserves or keep credit handy for surprises. We had a water leak, tree fall down, bathroom fan breakdown and flooding in the basement. If I didn’t have a reserve, there would have been trouble.
  3. Either live close to your rental or find reliable help. There are many people who will collect rent, fix up the house or manage the property, but most aren’t very good (according to my clients who were in real estate). You need great help or have to do as much work as possible yourself. I live halfway across the country from my rental, but have a great handyman, Dave, who is a quick call away, charges reasonable fees and responds lightening fast. To make sure he’s happy, I pay him the SECOND his bill arrives (that’s overstatement, but you know what I mean).
  4. Try to complete each “fix it” project yourself at least once, even if you’re going to find help.
  5. Remember that it’s a relationship with your tenant. My main goal is to have my tenant stay in the house. I’ve tried to make sure the house is well-maintained and I’m accessible so my tenant stays around. That said, I also need to keep up with economics. I’ve looked at rental prices in the area and raised the rent once in the past three years. I was poised to raise it again before I found out she had to move out (through no fault of mine…her son wants her to stay in his house while he’s away on business for two years. I can’t beat “free rent.”)

Are you a landlord? Have you rented from a good or bad landlord? Share your success or horror stories in the comments!

Photos: For Rent: Charleston’s The Digitel

Enhanced by Zemanta

5 Summer Activities to Create Money Savvy Kids: High School

by 29 Comments

Ah, we made it! It’s most rewarding yet the most challenging to work with high school students on money management.

While these activities are the most fun for parents, high school students are more difficult to engage than younger children.

If you don’t have high school age children yet, you may not know this, but your brains will disappear for about four or five years.

Looking for tips for younger children? Try:

5 Educational Summer Activities For Kids – Early Elementary

or

5 Summer Activities to Create Money Savvy Kids: Upper Elementary to Middle School

 

5 Great High School Activities

 

1) Family book club. Right now, my 17 year old kids and I are reading I Will Teach You To Be Rich by Ramit Sethi. If you haven’t read this book yet, by all means, start now. It contains powerful advice wrapped in easy-to-understand language.

Every day the kids read a chapter. Then, at dinner, we discuss that day’s reading. Sometimes these conversations devolve (“why does a stock go up or down?” “what’s a good Roth IRA investment?”), but I love it. Who doesn’t want to have relaxed conversations about money with a curious 17 year old?

Why I like it: I get to ensure my kids get to college with some clue about money before they arrive. Because I made sure the book was fun and easy to read, and because I don’t preach, we’re able to have great talks about money.

2) Engage kids in the Family Meeting. If you’ve read this blog before, you’ll know that I love the idea of a family meeting. Budgets within a family are more about good communication than about counting pennies. If everyone is on the same page spending each day will be more careful, and life is made up of these little crisp 24 hour periods.

Some people have a violent reaction to this advice. “Show my kid my bills and my savings? That’s none of their business.” You are correct, but lets challenge your assumptions: why is it taboo to talk about your financial situation with others, especially those as close as your teenager.

Boundaries must be drawn. You’ll have to explain what happens when the whole street learns about your finances. But in the bigger picture, if they help you pay the bills, evaluate savings and plan large purchases, you’ll hand them a lifetime of knowledge that they’ll appreciate down the road.

Why I like it: When we began talking frankly with our children about bills and savings, they began to see how tight every month is for the average family. Next year we were planning on going to France for their graduation. The reality of two children in college at once has set in and we’re downgrading the vacation plan to a rental house on Lake Michigan for seven days. No groans from the kids because they understand the math behind the decision.

 

3) Find a job. I’m not talking about grabbing the local Dairy Queen gig (if I had that summer job I’d weigh about 750 pounds!). I’m talkin’ about helping junior through the process of fighting for a summer internship at a resume-building position. If they’re interested in engineering, try to find opportunities with a large local company. If law or medicine, apply at  the hospital, a law firm, or the local doctor’s office.

There’s a ton that junior learns while creating a resume, dressing appropriately and speaking well. The training involved in competing for these positions is a good primer in adult life skills.

Why I like it: By working in a professional environment, high school kids get a first hand look at how business works. Studies have shown that people who work in “real jobs” before college are more likely to do well in the classroom because they know how their learning might apply in the real world.

4) Scholarship hunt. Finding money for college is a full time job. The internet is brimming with opportunities for money, but you have to know who to ask and what scholarships to pursue. Most high schoolers only scratch the surface when it comes to searching for scholarships.

Instead of one-offing each opportunity, we found quickly that many of the scholarship opportunities were similar. My kids could write a couple of basic essays and then modify them to fit each particular offer. Most needed references from teachers and community members. We didn’t just learn about scholarship, we learned about creating systems to efficiently attack more quickly.

Why I like it: By formulating essays and asking for letters of reference, kids learn about the importance of written and verbal communication. They also realize that “going it alone” isn’t usually a good idea. It makes sense to find some powerful friends to help you….AND my kids were surprised that most powerful people want to help.

5) Board games. I’m back with more board games to teach the family about money. This time the games are downright fun for adults. Games such as Acquire can teach simple mergers and acquisitions. Power Grid is a modern-day version of monopoly involving power companies. And, in this year when the politics of the nation are up for grabs, 1960: The Making of a President is a good primer on the campaign process while also serving as a fun way to learn some history.

Why I like it: Board games are a great way to spend time with your kids. Instead of arguing or fighting about curfews and money, you’ll enjoying each other’s company over a communal activity.

How do you teach high school kids about money? Let’s have some more ideas in the comments below!

 

Photo Credit: Reading: NannySnowflake; Internship: ChesCrowell

Graduation Gifts: What Should You Do With Your Money?

by 21 Comments

‘Tis the Season!

Well, not that season, but another highly anticipated one: graduation season.  Hundreds of thousands of college and high school graduates are donning caps and gowns,  shaking hands, having parties, and most likely cashing checks.  The real question is what to do with all of this money?

Let’s break our discussion into two categories: high school graduates and college graduates.

High School Graduates

We’ve talked about it periodically: most kids aren’t taught anything about how to handle money and for some, graduation gifts can be their first experience with large amounts of cash. If there’s not an exact plan, it can blow away faster than the autumn leaves.  This is job number one for parents: sit down with your kids and discuss what the plan is with the graduation money.  Here are the top 3 things high school graduates can and should do before cashing a single check.

English: PJPII graduates entering local church...

High school graduates entering local church for graduation mass, May 2009 (Photo credit: Wikipedia)

 

  1. Establish the maximum dollar amount of your graduation gifts that you’ll allow yourself (or your kid) to spend on fun.  I don’t have any problem with high school graduates blowing a certain amount.  I mean, it is a joyous occasion and high school graduations should have a certain amount of indulgence.  But, just like anything finance related, you have to go in with the end in mind.  Failing to plan is planning to fail.
  2. Decide what’s going to be set aside to be spent during the first semester of college.  Assuming you’re heading to college in the fall, no matter what you think you’ll need from graduation gifts, you’ll want more.  Accept and embrace the reality: college will cost more than you think.  If you can set aside a couple hundred dollars today for those rainy October weekends far from home, you’ll feel a lot less guilty about skipping the meal plan and ordering a pizza for your roommates.
  3. Take at least 1/3 and either invest it or give it away.  Those two options sound like opposites, but they require similar mental acuity.  We only give things away when we have an abundance mentality – we only invest if we have a strong faith in the future.  Take one or two hours and pick a solid blue chip company, set up an online brokerage account, buy some stock and don’t touch it for 30 years.  You’ll thank me later.  Oh, and don’t forget to reinvest all your dividends from your graduation gifts! You’ll want those growing, too!

Don’t let this great opportunity for teaching kids about money slip by.  There are only a few “found money” times throughout one’s life.  Use graduation gifts wisely.  Any high school graduate should be able to take this money and use it to get ahead in life.

Next week we’ll talk about what college graduates should do with their “found” money…stay tuned!

 

Enhanced by Zemanta

How Did You Golf Today? Ask Me About My Portfolio….

by 14 Comments

If you’re a subscriber to our podcast, then you know one of the things that I really enjoy is golfing – so it’s not uncommon for people to ask (even if they’re somewhat kidding) “So, how did you golf today?”  (Truth be told – pretty bad.  I’m usually a mid-80’s golfer, but today I shot a 93.  Boo.)

To me, answering the “how’d you golf today” is the same as “What did the market do today?”  I don’t like answering either.  Trust me – when I golf well, or if the market did exceptionally well today, I’ll let you know.

Golfing and investing are very similar; they both require similar skill sets and disciplines.  Last week  discussed how you have personal responsibility with your investing plan

– today let’s talk about what to do when you hit a wayward tee shot.

Sometimes even with the best swing, the ball just slices ever-so-gently into the rough (or as was my case today, the bunker).  How do you respond?  Well, there are two ways: first, you can throw your club, swear at the wind (or the tee box, or your teammate, or whatever) or you can focus on what you need to do to get the ball back in play.

 

One of the first things I learned about golf, after I gave up the swearing and became  semi-serious about it, was to always try to get the ball back in play.  If you’re in the bunker, goal #1 is to not have another bunker shot.  If you’re in the rough, goal #1 is to get it out of the rough.
Unless you’re pro golfer Bubba Watson and can snap-hook a 7 iron from 185 yards in a playoff hole in the Masters, goal #1 is just to get the ball back in play.Investing and financial planning follow the same logic.Sometimes you hit a crappy tee shot (read: make a bad initial investment, have some external

 

force impact you financially, etc.) and you can respond only one of two ways:  you can throw your statement, complain about how your broker screwed you, whine about how the dude on CNBC lied, or:

you can get back in play.

Sometimes that means you have to punch out of the rough under a tree branch; sometimes you have to layup to the 100 yard marker; either way, don’t get upset – just get back in play.

When you make a poor investment decision that means:

1) Don’t worry first about assigning blame. Worry about correcting the problem.

2) Stay calm. Getting upset isn’t going to help you create better returns later.

3) Once you’ve regrouped, THEN determine what went wrong. Was your broker the problem? Did you not analyze the investment correctly?

You’ll invest much better following these simple steps that I learned from playing golf.

A Chart that Frightens Me: Investing 101

by 20 Comments

In the past several weeks, I’ve ground my axe on charts that are either misleading or actually say nothing.

Today, let’s counterpoint: I’ll show you a chart that makes sense to me AND fills me with more dread than seeing Aunt Ernestine in a swim suit.

…a rather unflattering swim suit.

I found this chart at FRED, an acronym for Federal Reserve Economic Data. This website is chock-full of charts and graphs direct from the government and financial institutions. And, as a bonus, they’re usually easy to understand.

Bonus!

Here’s the chart I’d like to focus on today, class:

Fred 10 yr 1 1-4 percent treasury inflation-indexed note, due 7 15 2020

 

So, if you aren’t familiar with Treasury Inflation-Indexed Notes, don’t start nodding off on me! I’ll have to send Aunt Ernestine over to sit on your lap.

That woke you up.

Let’s explain what the $%!@ we’re looking at here.

As you can see on the header, this chart shows the yield-to-maturity on a 10-Year Treasury Inflation-Indexed Note.

 

What’s a “Treasury”?

 

Investments that are simply referred to as a Treasury in the U.S. are products of the U.S. Government. They’re sold at an auction. The amount of the note is fixed (you buy in $100 increments), but the interest rate is what they bid on. If nobody bids, the government will have to pay a high return to lure investors. IF lots of people bid, the government is able to sell the debt for a lower price. Initially, this debt was priced at 1-1/4%. That’s a nice win for the U.S. Government.

As an example, if you have great credit, you do this with credit cards. Instead of jumping on the first credit card offer, you examine the interest rate. If it’s higher than you want to pay, you keep searching. Essentially, you’re pitting “investors” (lenders) against each other for the pleasure of holding your debt.

What’s a Note?

 

A note is a ten year bond. Once the bond is issued (this one was issued in July of 2010), it’s paid off ten years later.

Do you have to wait ten years to sell your bond? No. You’re allowed to sell early, but you’ll do it on the open market.

The open market conditions produced this graph.

 

What Does the Graph Show?

 

This graph DOESN’T show you the price of the ten year bond. Instead, it cuts to the chase. If the bond is sold initially for $100 (called the Par Value), and an investor will give you $105 for it, he should already know that he’s only going to receive $100 when the maturity date comes. Therefore, it’s a simple computation: if you over or underpay, what is the true interest rate you’ll receive?

This chart shows the true rate if you purchased this 10 year note today.

In short: the price is so high you’re guaranteed to lose money.

Ouch.

 

Why is this Frightening?

 

If investors are comfortable loaning money to the government, knowing that they’ll lose money, this means that other places to invest money are even uglier.

In short, we can discern:

– There is much constenation about the financial markets now

– Lots of investors feel comfortable losing a little money with the U.S. government

From that I infer that investors think they’ll lose more elsewhere.

 

Is This An Opportunity?

 

Clearly, there is less opportunity in Treasury Inflation-Indexed Notes than there is with Aunt Ernestine. However, some investors may think that this means that the panic has gotten so high that there are obvious opportunities elsewhere.

Maybe.

Remember that the majority of traders have more money than you and I. Professional traders work from platforms that spend more money on research than we spend on our homes. If you’re looking for opportunity, it isn’t apparent in this particular graph. You’ll need to look further.

 

Where Do You Look Next?

 

This chart leads me to want to see past correlations between the 10 Year Treasury Inflation-Indexed Note market and other financial markets. By viewing these, I might be able to better discern if this is simply panic or something bigger.

More on that another day.

For today, know this:

– FRED is a good place to find charts and graphs

– Treasury note graphs can give you clues about the market overall

– You can lose money in government bonds if you buy them on the open market

 

Is there anything I missed here? Let’s chat about this market and investments in the comments, minions.

Facebook and Morgan Stanley: Who is To Blame?

by 15 Comments

Whose responsibility is it when your investment in Facebook or Morgan Stanley declines in value? The company? A broker?

Certainly you’re not to blame.

The current proliferation of lawsuits against these companies makes me ask a straightforward question. Should there be lawsuits against Facebook and Morgan Stanley? (See these articles for more information if you don’t know what I’m talking about: Forbes: Facebook Lawsuits Piling Up.)

I’m reminded of society’s lack of personal responsibility each and every time I drive up the highway to see my mom.  I haven’t added all the advertisements up, but there is a certain personal injury lawyer in our town who advertises everywhere.  I don’t know this lawyer intimately, but my wife works in the same office building and sees the people who come in and out of the front door.  There are all sorts of people trying to sue for anything under the sun.  Instead of trying to take over the world, they’ll just take it from someone else, because somehow, they’re “owed” something.

One of my favorite books is The Road Less Traveled by M. Scott Peck, M.D.  That book contains my favorite quote from any book:

We cannot solve life’s problems except by solving them. This statement may seem idiotically tautological or self-evident, yet it is seemingly beyond the comprehension of much of the human race. This is because we must accept responsibility for a problem before we can solve it. We cannot solve a problem by saying “It’s not my problem.” We cannot solve a problem by hoping that someone else will solve it for us. I can solve a problem only when I say “This is my problem and it’s up to me to solve it.”  But many, so many, seek to avoid the pain of their problems by saying to themselves: “This problem was caused me by other people, or social circumstances beyond my control, and therefore it is up to other people or society to solve this problem for me. It is not really my personal problem.”

This is as true in the investment world as anywhere. As an investor, you must accept responsibility for your own investing decisions.  You cannot blame others for your decisions (or indecisions).  You won’t help your cause with a “I’m mad I made a bad decision in investing so I wanna sue everyone” mentality.  Recent lawsuits against Facebook and Morgan Stanley make me crazy – I don’t believe for a second that if some magical prospectus would’ve fallen from the sky that all these people wouldn’t have bought Facebook stock.  There’s all this talk about how Morgan Stanley screwed everyone and how Facebook lied — why didn’t these people do their own research?  Take some personal responsibility!  I’m pretty sure that had Facebook stock gone from $38 to $75 in one day, Morgan Stanley would not have called all the new shareholders and said “Oops, we priced this incorrectly so we need to sue you to find a more correct price.”

As an investor, you and you alone are responsible for the actions and outcomes of your investing decisions.  Whether you have an advisor, a consultant, or are a DIY’er, remember one thing: it’s your money.

Be accountable for it.

Enhanced by Zemanta

Beware Charts, Graphs and Snake Oil

by 15 Comments

I did away with my Boner of the Week! series that called out stupidity in financial media and blogs because I didn’t want to be that guy. Well, at least not be that guy not every week.

But this site is called the Free Financial Advisor for a reason. My task is to show people the difference between the truth and lunacy; to dole out useful tips that you can apply, sprinkled with my own quirky sense of humor.

Buy the doughnut, the frosting comes free. Bargain!

What I also drag along is a HUGE sense of anger when I see absolute baloney (polite terminology) on the internets.

I fought it as an advisor, and I’ll fight it here for you.

So, this week I’m going to un-bury the Boner of the Week! segment, along with the prerequisite, er, uncomfortable picture. Because I’m too lazy to find a new one, you’re treated to my favorite from the old series.

You’re welcome.

Let’s rant:

 

A Tip For New Investors:

 

If someone shows off a chart with a couple squiggly lines and points at them BUT REFUSES TO TELL YOU WHAT THEY MEAN it isn’t “analysis.”

It’s smoke and mirrors.

That’s why I like the DQYDJ blog and ws fired up when PK agreed to join our little podcast. He presents a chart or concept and then explains it. I’m a little smarter for visiting DQYDJ. Check out How Do You Know You’re Ready For Active Investing? Sure, I get PK’s returns, but I also get books to read, a chart on his personal progress and the story of how he began. Good story, good tips, good times.

Onboard?

Don’t try to just show me a chart and tell me “I predicted the financial markets would decline, and see, I’m right.” No reference to how the chart works. No rationale behind the prediction. Just “I’m right. Deal with it.”

Even if the chart is flippin’ brilliant, do you treat financial sites like the circus? Do you come here to see my dogs and ponies? My smoke AND mirrors? Do you want me to flash you a quick glimpse of my 12 inch wealth of knowledge so you can swoon over it?

Hell, no!

Like you, I visit sites for tips and tricks THAT I CAN USE. I don’t want to be shown stuff that I don’t understand.

If you hand me a shovel and I don’t know how to dig, all you gave me was a stick with a funny metal end.

Our “Boner of the Week!” target post (which I no longer point to directly, because that’s not the point of the piece….the point is to help you make better, more informed decisions. If you visited this bloggers site this week, I’ll apologize on his behalf), told us this week that “Mr. Brilliant” called the exact day the market was going to decline. He then advised us to stay out of stocks because it’s a bad, bad time for the market which will correct to (AND THEN HE BESTOWED UPON US THE EXACT RANGE!!!!).

Someone alert Jim Cramer. There’s a new sheriff in town.

Why the hell isn’t this guy working for a huge Wall Street firm or being paid the big bucks by wealthy investors who eat these gurus up? I used to ask my clients this question when they’d bring in what I’d call “miracle fliers” from their mailbox. Some dude telling them that he has all the answers.

I was a good financial advisor. I knew one thing: I didn’t have all the answers. Ta-Da!!!

Oh, my friends, that alone wouldn’t raise my ire. Ready for the next one?

Then he tells us to subscribe so we can find out what stocks we should buy when the time is right.

Thank you, your lordship Mr. Merlin soothsayer.

I don’t want a magical list of stocks. IF I did, I wouldn’t be looking for them on your free internet site.

Here’s what I want: tell me the criteria you used and I want to be taught to use it.

 

What I’m Railing Against

 

Did the dude call the market?

Yup. It appears he did.

Could he know how market conditions work?

Yup, he maybe can.

Are you just whining, Joe?

No.

I want this dude to tell me why, not what! A site like this is dangerous because you become dependent on the author. What happens if Mr. Brilliant has a Philly cheesesteak sandwich that doesn’t agree with him tomorrow and his indigestion decides that you should go 100 percent into Zynga stock? Or he tells you that the end of the world is coming and you should sell everything? Would you just follow like a lemming off the cliff?

  • Don’t follow someone blindly.
  • Learn to do your homework.

I naturally mistrust when ANYONE tells me they can call the market (after 16 years as a financial pro I saw professional gurus get beaten down by the financial markets time and time again).

One of my favorite stock trading books is called Trading Rules: Strategies for Success’ target=_blank>Trading Rules, by William F. Eng. The basic tenant of the book is that you do yourself a huge favor when you quit pretending you know anything about the financial markets. Once you realize that it’s a freakin’ scary-ass place, you’ll start protecting yourself and making money.

One of Mr. Eng’s fundamental rules: Tips Don’t Make You Money (Rule 7).

William F. Eng is a wealthy trader. I understand his background. I know nothing about wonderboy Mr. “I called it” dude.

Set stop losses. Learn how fundamental analysis works. Explore technical analysis.

But don’t let someone tell you when it’s the time to buy and the time to sell JUST BECAUSE THEY TOLD YOU SO!

They won’t lose the money, you will. And then you’ll be cursing the blogger, who won’t hear you over the dance music he’s playing for the rest of the suckers who hang on every word he says.

Rant over.

High Yield vs. Other Investing Categories in Pretty Pictures

by 14 Comments

When words don’t work, I’ll emulate my buddy PK at the DQYDJ blog and resort to graphics when explaining your investing options. Since I can’t personally be bothered to create any type of creative chart, I’ll instead use a graph that I  received from a friend.

Before we peruse this particular investing chart, I should introduce it, like a big star explains the movie clip:

People worry often about risk when investing. You should. It doesn’t make sense to risk your portfolio without knowing what type of return you’ll receive.

As an example, one of the riskiest investment classes is art. I know and you know that your dogs-playing-poker is probably a timeless classic, but beauty is definitely in the eye of the beholder on that one. Unfortunately, if you paid $10k for your Velvet-Elvis-and-the-Eagle rug, that’s probably considered a capital loss.

Here is the risk/reward profile of high yield vs. other asset classes:

 

Chart of Risk and Return

 

People are generally shocked when they see the risk/reward profile of high yield bonds. Is it true that JUNK BONDS are significantly less volatile than large-cap stocks?

Yup.

High yield bonds aren’t much more volatile than 10-year treasuries (which, ironically, have been more volatile than investment-grade bonds)?

Yup again. I knew people who came to this website are flippin’ brilliant.

Maybe now is a good time to review my posts last week on the topic of high yield bonds:

Off topic: Check out German stocks. Lots of volatility, plus those people wear black socks with sandals. I don’t know what those two points put together says, but it sure feels awkward.

 

How about you? Does this chart surprise you? Can you see my love affair with high yield? Make you laugh? Improve your outlook on life?

Enhanced by Zemanta

JP Morgan: Opportunity or Trap for an Investor?

by 15 Comments

While gold seekers in the stock market chase the Facebook IPO like NASCAR fans after a Dale Earnhardt Jr. autograph, my attention is leveled at JP Morgan Chase. I’m wondering if their recent stock hiccup is an isolated mistake or the beginning of a larger crisis.

This isn’t how most new investors act. Most hear bad news and run the other way.

You can profit from investing well-placed dollars into investments while others panic. In fact, I think it’s fun to prey on investors who throw logic out the window and panic.

 

In 2004, when investors panicked and sold investments around the Indian ocean after the tsunami, I snatched up iShare Singapore stock exchange shares (ticker: EWS). This was an easy decision: while many of their trading partners were hit hard, Singapore was not. There was bound to be a ton of shipping to rebuild the region, all to Singapore’s gain.

 

While not a homerun, the stock was an easy win. I’m not looking for huge gains….I’ll take good gains while minimizing my risk.

 

I didn’t want to prey on the awful event….I was very happy to prey on the morons who thought this was a good time to sell their investments in Singapore. Do your homework before panicking.

The market is usually a fairly efficient beast (I don’t want to have the “efficient market” argument in the comments, so please save them for another site), but during times of panic there’s money to make.

So, after JP Morgan Chase announced a $2 Billion dollar loss last week, hopefully you  also thought: “this looks like an opportunity.”

Not so fast, cowboy.

Before you invest money into ANY struggling company, you should understand the risks of this strategy. I do well because I pick my stock market spots carefully.

It looks so juicy, though!

 

Agreed.

On May 1, JPMorgan (JPM) was trading at $43.79. Yesterday JPM closed at $35.79. That’s a loss of over 18%.

If your thoughts immediately turn to “too big to fail,” you might be right (jokesters are out in droves with “too big to regulate” and others today).

As of July of 2011, JP Morgan was the eighth largest bank in the world, according to Reuters:

 

World's Biggest Banks - Reuters

 

By many accounts, while $2 billion is large to you and I, JPM manages a stable of $2.2 trillion in assets and should be able to weather this storm.

Still, we need to do our homework before investing.

 

Follow These Steps

 

1) Understand the company, not just the situation. There will be news around JP Morgan in the next few weeks that I can almost guarantee will affect the stock price. Even if none occurs, it’s better to plan for news. Because you don’t know what the headlines will read tomorrow, have a solid a feel for the operation and scope of your target company to process how the news affects your position in the stock market.

Buying distressed companies isn’t about the initial purchase. You have to follow and respond to breaking news closely.

2) Evaluate the Risks

3) Sector analysis

You might find your dream company with an “oops” situation that’s easily fixable is in a nightmare sector where events are working against you. Any chance of a stock rebound is wiped out by prevailing conditions.

I thought this might be the case in early 2006. Ford pre-announced during their earnings report earlier in the week that they were going to unveil a major restructuring plan on January 23. Although layoffs aren’t a good sign over the long term, these quickly buoy the bottom line, giving hope to investors that the company will turn the corner. On the surface, this looked like a great event to invest in; a sure win.

There were significant downsides in the sector: at this time, the Detroit auto scene was in shambles. Auto supplier Delphi had declared bankruptcy only months earlier. Chrysler and GM were experiencing pain of their own. Did I really want to bet on a nice uptick in Ford stock over the short term when other auto news might sink my gains?

I explored the situation further. GM had already announced for the quarter a few days earlier. Chrysler had already experienced their blood letting, so I didn’t expect any short term news to disrupt what was looking like a quick trade.

In the final analysis, I made the trade, but because of the larger situation in the sector, I committed a much smaller portion of the portfolio than I’d originally intended. Plus, I became adamant that I’d set a quick turnaround on the stock. I’m usually a long term investor, but in this case, I was looking for a quick win.

I got it.

The morning of January 23, Ford announced a 30,000 job cut and the details of the restructuring. It was as large as expected. A stock that was trading at $7.90 the Monday before closed at $8.65 on the 25th. I was out, though, selling at $8.60. Nearly 10% in a few days was enough risk for me. This was one of only two or three times I’ve ever made a quick trade, and I don’t normally recommend it.

JP Morgan isn’t the same situation, but hopefully you understand my point: by analyzing other auto companies, I minimized the chances that news from them would work against me.

In the case of JPM, you’ll need to consider that state of banking. Is there any pending legislation that may affect performance? Is 2008 or a similar melt down in this sector or the wider stock market likely to occur?

4) Set defenses in place. Beginning investors should always work with a defensive strategy. I prefer a stop loss, but you may have other ways to reduce risk, such as the use of options. If you use a stop loss, you’ll want to give it a wide berth off the current price. Any stop loss placed within a few percentage points of the current trading level is bound to trigger due to the increased volatility of the stock.

 

magnifying glass II

 

Widen Your Lens

 

Because of a high credit rating, JP Morgan debt has been expensive, usually trading well above par value. If you feel JPM isn’t going to go bankrupt, then maybe looking for panic in the debt rather than the stock market is a better option. Here are some reasons I like trading debt instead of equity:

  • I know my end game (I’m guaranteed par value on the security at maturity as long as they don’t go belly up).
  • I can still sell on the open market.
  • I’ll receive dividends along the way, reducing my risk.

One such beast is a preferred stock. We’ll address preferreds in detail another day, but although they carry the name “stock,” a preferred acts much more like a bond.

A few questions to ask before investing in bonds or preferred stock:

  • What is par value. Many JP Morgan preferreds are trading at $25.50 or higher currently, while par value is $25 for preferreds (it’s $100 on most bonds).
  • What is the dividend? The stated dividend is based on the par value, so your dividend will vary from that stated on the preferred. If you’re using a website such as Bigcharts.com or Yahoo! Finance to evaluate the stock chart, the listed dividend is in fact the dividend you’ll receive at the current price.

Don’t just explore debt. Think further afield. Are there other companies that stand to win big because of JP Morgan’s stumble? Research these firms thoroughly before investing.

 

Final Thoughts

 

I’m not sure if I’m going to invest in JP Morgan. I’m more likely to buy here than in Facebook, a company with lots of hype and whose upside I don’t understand (most of my friends are tiring of Facebook, never a good sign for any product).

If you take anything from this discussion, I hope it’s the following:

– Think contrarian. When everyone else is running, ask “is this an opportunity?”

– Don’t buy immediately based on your contrarian “gut” reaction. Like buying a house or car, perform due diligence. Explore the company, the situation and the sector. Widen your lens to see if there are additional plays (such as debt or a competing company) that might make sense.

If this sounds like a lot of work, or individual stocks don’t fit your risk profile, stick with ETFs and mutual funds. Your chances of getting burned in your investment strategy is significantly reduced by staying diversified. Even if you do invest, don’t take large chances on “rebound” companies with significant portions of your portfolio.

Let’s pretend you were me: would you buy JP Morgan with a few “at risk” dollars? Are you jumping on this stock?

 

Enhanced by Zemanta

The Waiting Is The Hardest Part

by 17 Comments

I called my mother in law to check in yesterday.

I get worried about people after a loved one dies, but especially I’m concerned about her, right now. My in-laws were a close couple. She’d always yell, “Dave!” at him for one reason or another, but there was a camaraderie in her admonishments.

She enjoyed admonishing him and I could have swore he enjoyed being admonished.

There’s no way I can imagine what’s going on in someone’s head the day after their spouse passes away. It’s beyond imagination.

Still, my call to her was shocking.

I was surprised to find that she’d already called her financial advisor about moving money around and scheduled a meeting with the Medicare people about Papa Dave’s hospital bills.

Wow.

A piece of this I understand:

– The need to keep moving.

– The desire to run.

– The longing to make things feel better and to grab control.

I understand that, and it makes me want to give my mother-in-law a big fat hug today. All the running in the world won’t make the pain go away. There isn’t a hug big enough to swallow all those years of being together.

That’s why it’s a difficult pill to swallow when I tell you what I told her: Be still. Wait.

When any major life event occurs, the worst decision is to change your financial picture.

My best advice? Do nothing. Zip. Zero. Nada.

Too many times I’ve had clients come in after a spouse passes away and they want to make changes. Not little changes, mind you, but major, life changing moves. Let’s guarantee my money won’t run out. I want to take a trip around the world. It’s time to sell the house and move closer to my kids.

These are all valid thoughts, but not for today. Today’s a time to work on other areas.

– Go for a walk.

– Sign up for cooking classes.

– Learn a new language.

– Dive into a hobby.

All of these are positive life experiences that you can bow out of later without major repercussions. If you decide to sell your house and move, what if you don’t like the new place? If you change investments and the market tumbles, how will you respond?

Too many times I’ve witnessed people who’ve made life changing decisions without a clear head, only to regret all the moves later.

Often this regret, coupled with the sorrow of the original loss, is crippling.

How long do you wait?

I don’t know. 16 years of advising people who watched spouses, parents and children die still wasn’t enough for me to help you there. I can say this: Everyone was different. I will tell you that both my client and I knew when it was time to start moving. I’m sure you’ll know, too.

So, maybe Tom Petty was talking about a completely different topic, but he’s still right: The Waiting is the Hardest Part, but it’s the most important. Wait.