"Price" and "Value" are different

Recently Warren Buffett spoke at his annual meeting and reviewed the distinction between "Price" and "Value"...concepts that are very much confused these days...He reviewed that over 30 years ago he bought his home in Omaha for a very low price, and it is very priceless now...ditto for many of the other things he has bought...He mentioned that even if a high quality object is priced high, it can be priceless over time, and that is his method of investing.... I well remember when I attended the Masters program in Wisconsin in 1969...The outstate tuition was $1000 a semester..I had just worked a year for $500 a month in Minneapolis and saved for the first semester, and a friends family borrowed me the second semester tuition....It seemed like an enormous amount to owe....$1000. Just days after paying my second semester tuition, the University was shut down with riots over the Vietnam war...classes cancelled...no refunds for tuition given...However, the relationships I formed with the UW film society of grad students were the priceless thing that year that I only discovered years later... When we bought a home in Evansville, I remember it was in December of 1989...and the home cost $49,900. Over 25 years, the home would allow us to refinance and help our kids go to college, and all the while enjoying a home built in 1912 with craftsmanship and quality...And even though the price seemed high for us though low for many of our loved ones in the Metro Minnesota scene...we avoided the inverted mortgage heartache that has plagued many friends and families...Only over time have we understood the "value" we have enjoyed. So there it is...price always seems high...but over time...on reflection...when things or skills or relationships of quality are obtained...there are just smiles in the memory...

The "Limbo Rock" or When to Buy?

One always wonders when there are large stock market corrections.....when the "Limbo Rock Rule" applies. When to buy?. Usually you can see lots of stories by financial professionals these days with various theories. Usually they are based on a large....very large perspective. I like to look at it from a very small perspective. Where there are entry level workers, A, married to entry level workers, B, who desire to purchase a home, C, -----How much do their wages have to be increased to allow them to qualify to purchase that home at fair value, using traditional mortgage ratios? Just reflecting on that question brings one pause as to what percentage house prices might have to fall....... and on the other hand,....... how much wages might have to be increased to allow traditional lending to be restarted. This equation and question will not be discussed in any of the pundit articles today, and yet, until it is discussed, nothing will be solved. That is how I see it. From the small perspective of my world. And you? You make the call.

The Deregulation of Wall Street;; and What it Means for you

Over the past thirty years there has been a transition from a structured investment environment to one that is "deregulated"---it has been marked by the end of the era of salaried brokers with higher commissions and research, to a world of $7 trades and computer simulations. It has been a movement from wise older traders to young, churn and burn robots. "Where has been the saving,?" you might ask. I like to compare the situation to the airline industry. Years ago, when airfares were higher, and Northwest Airlines had ZERO debt, the transportation industry and financial services industry was seen as a public sector, where the government had a say in an organized and supervised code of conduct for all participants----those days are gone. When I fly, I always feel more comfortable when I know there has been maintanance done on the engines. The cheapest fare is not consoling if I see flames coming from the engines. Ditto for the financial services industry. When investment just becomes a transaction, when people just become a transaction, and when "churn and burn" becomes the overriding element in business, the customer always loses. Consequently, I reject the notion that nostalgia for the good old days of regulation is senile and old fashioned. I believe it just makes economic sense for the investor. Recently a lone French trader for a bank, using "proprietary trading funds", in the throes of breaking up with his girlfriend, took enormous options risk and....despite the bank even knowing about his risks, but not understanding it or choosing to ignore it for fear they would impede some gains, caused a 7 billion dollar loss. Imagine what would happen worldwide if just a dozen or so financial professionals broke up with their girlfriends. Yes. Girls that is something to consider. You may think you are just breaking up....but you might just be causing a global catastrophe. Be True to your man....o.k. In summary. The incredible catastrophe of ENRON was not just ENRON. The real catastrophe was that as a nation we have modeled our financial institutions on ENRON. And we have the major tactic of DELAY, the verb, not the noun.

Where Have all the Investors Gone?

If you read the Wall Street Journal or any of the business magazines or newspapers, one would think that every American is an investor? In truth, we have become a nation of mostly fixed investors scarred by the recent Crashes...and most of the trading is done by computer quants for large hedge firms or banking institutions and their propreitary divisions, and yes those are the very ones that inevitably do not supervise their employees very well...and thus...there are trading losses...like the recent one for 8 billion dollars by the "London Whale." These trading machines and their minions are adored by the current business model, and thus they have short names like movie stars, maybe Cher, Rocky IV, Bond etc....They are the "quants", the programmers, sitting in the room with all the screens, and if not writing some new code for automatic buys, they are playing poker or some other game. It is a new world.

Who do You Blame for Your Losses?

Let's imagine that you have created a product...and after the first introduction of the product, the first consumers are able to give feedback on how the product worked for them....imagine that the original designers and creators of the product can observe...through a glass viewing area...i think you can imagine the result...any feedback on any little improvement of the product seems very similar to what would happen if a mother presented her child to her relatives and they had a few corrections as to how to make the child better...in short.... If you buy a stock, and it does not go up...cut your losses quickly...whatever you thought must have been wrong...and those who do not recognize this fact quickly face huge losses..in stock selection and life...the ability to recognize when a wave is not going to be the best to ride...but the wise course is to quickly cut off the ride and find another wave...be a surfer..not stubborn and fighting to be right...but being flexible...and ready..for the new...

Make a Wish

Remember the Make a Wish Foundation? This was a foundation that provided a dream come true for a deserving person who faced a terrible disease etc....There is a difference between "Make a Wish" and investment....And that difference is important it seems to me. When one is young, one thinks as a child, but then later, when one is an adult, one learns. And a child relies on "Daddy" or "Mommy" to make the decisions, or in business matters, an "investment professional." One assumes that the professional knows best, as in the tv show "Father Knows Best." However...the current ethical requirements for investment professionals requires that they not be guilty of negligence, and not that they in fact have followed the objectives specifically or have acted in the best interest of the client...Thus...eventually, the investor comes to the realization that knowledge is important, and that each person, man and woman, young and old investor alike, must become knowledgeable about investing. Objectives must be thrashed out, and the investments must be made that match these goals, and when a firm is used to make the investments, one must make sure that each transaction is done correctly. As a young man, my mom and dad were bond investors, and I remember on the kitchen refrig was a list of the bonds, and when the dividends paid, and what the amount was. My mom used to check off the dividend checks as they were received..and I also remember the effort that she made when a check was not received..letters etc...she made sure..Nobody made sure for her. And so, some fifty years later, i also am checking off the dividend checks, even if they are electronically deposited...and I think of how my mom's checklist showed me the way..thanks, mom.

A bit on Dividends: The Peapod Game warning

"The Peapod Game": and variations: There are some old pictures of New York, and you can see on the sidewalk, the young men gathered in circles with dice, and a blanket, and some peapods and shells. As the man moved the shells, one had to guess under which shell the peapod rested.....It would have been glorious if each young learner had learned that game...cause that game and variations are the basis for many investment schemes. One of the doctrines on Wall Street, and used to be enforced quite strictly was the rule that when describing a dividend, it had to be made clear to the investor that when the dividend stock went "ex" the stock was reduced by the amount of the dividend, so that it was a "zero sum" game...it was not extra so to speak, it was just your value coming back to you. At the end of every tax year, there are folks that buy stocks that offer dividends and sure enough, when the dividend is issued on December 31st, the stock declines by that amount, and the investor gets the dividend in the mail, and then also gets taxed on the income from it....when in fact it was just "return of capital" so to speak. A variation on this is when a company sports a very large dividend, say 15%. You might notice that as the year goes on, the stock goes lower and lower, and then discover that the cash flow of the company cannot sustain the dividend, and inevitably many investors discover this, and the stock declines...and yes eventually you lose on the taxes and the decline in value of the investment.... So the general rule: If you see a deal that seems too good to be true--check further...it probably is too good to be true.

The Pump and Dump

The new digital Bucket Shop on Wall Street In the roaring twenties, in the midst of all the excesses of Wall Street, there were groups of traders that gathered together to pump their favorite stocks---whether one calls them the bucket shops or syndicates or whatever, they were the "pumpers" of their pet stocks---and if one just thinks about what that looks like today---it is the same...and the guys and gals are on the tv morning stock shows pumping their favorite stocks all the way up....until they go down...I call these guys the "Masters of the Pump and Dump"---it does sound like a filling station..I know...

When Things Go Up, Up, Up----a true story

"When things go Up, Up, Up"----a true story Back in 1986, I worked for E.F. Hutton....and was just getting comfortable in the job, when I added a client who wanted some growth for his portfolio...and I was grateful to have his business...and so I made a recommendation for a stock for investment, and he invested a couple thousand dollars... About a week went by, and I noticed that due to some unusual news story, the stock had doubled...I was just stunned...and I called the client and he said to sell and take the profit...so I did... Between calls, I asked a senior broker about what to do if the very first trade a client makes doubles...what to do next... She replied that this was a very bad way to begin a financial relationship...because the client thinks that this is the "norm." The problem is what is the next idea that will in any way follow the first idea.... "Things go up and down" she said...."When things go up to the moon, usually they come down just as fast...." I think a lot of her words lately...as markets go up, up, up, and where main street since 2007 has not seemed to make much progress....and thus I just remember her words...and plan accordingly....

The "Plenty" Rule

"The Plenty Rule" While many a man would like to puke hearing women constantly go over, "Well how did that make you feel," ad nausaum, the one area that it is appropriate----is the one area that it is least applied----namely money and the sense of security or plenty. Too often those revered financial planners---mostly men---possibly only folks that have passed some sort of exam that equates security with amounts of life insurance and mutual funds in hand--pontificate in a very abstract way that makes customers wonder---and rightfully so. I would suggest that it is talked about in such mathematical terms since the investment in insurance and stocks is so high that one must begin at the age of 7 in order to make the numbers come out. Phil Laut, famous author of "Money is My Friend," went over the essential rule in a Saturday morning seminar held at the St. Paul Hotel some 20 years ago. His rule was that if a person did not have a sense of plenty, even though lots of money was accumulated, that person was destined to lose it. This concept shocked me. Being a rational guy and all. The feeling or anxiety of scarcity would cause that person to screw up and make inappropriate investments and lose. On the contrary, the person who had a sense of plenty even though poor had a better foundation for gaining a great wealth and keeping it----and being wealthy in every sense of the word. So. Is Plenty a feeling? Or is Plenty a fact? You make the call.

"Charts" describe the past, not the future

The past is over....so you may see some financial pundits describing the action of stocks or markets in stock formations and acting like this is deep science and that this tells deep secrets about tomorrow...to the right of the chart is blank...that is the future. Nobody knows...trust me.

Prepare for the Swans----black or white

The classic "Black Swan" is a must read, and describes the possibility of a foreign event causing the crash of the stock market. One must always consider that this is possibility...and prepare for it by hedging in some way. There has been some quibbling with the title of the book, and a subsequent author has suggested that internal market forces, or "white swans" could cause the crash...Prepare for both...Computer systems malfunction and cause panic...these are realistic events and have happened frequently in the past five years. Be warned.

Stay delta neutral

What this means is that you should have the ability to be positive and negative on the market, and can buy or short a stock. When stocks are overpriced, one has to short or take an option against it...one wastes a lot of opportunity if one only knows how to buy and not sell. Most folks that have stock positions have them in margin accounts anyway because that is the standard, and their own broker is probably short against them.

Stay Small

There is a certain history of trading in markets that suggests that the "big" hitters trade big. But if you do the math, you can see that for a person of average size account, it is very dangerous to concentrate into just a few stocks...the key is to buy small amounts. In fact, some of the best things I have ever done were the very highest quality expensive stocks and just a few shares. I am talking of the finest of the SandP 500. The days of trading cheap stocks that have no real earnings is over..forget it.

Daytrading is not Investing

Most ideas you see on TV shows about Wall Street have a very short time perspective...One morning oil is plunging, and the next morning it is going to the moon...Daytraders can make money playing with the volatility of the markets, and can serve a useful purpose of providing liquidity to the markets, but never confuse the ideas on tv shows with "investing." No matter how fast you think your computer is, or your mouse handling skills, the program traders are faster...trust me.

DRIP Stock Investing

Individual companies allow investors to invest in company stock through DRIP, or direct investment...You can google DRIP investments or look for books on this method in the bookstore and see how this is done...There are usually NO fees. The only drawback is that when you redeem your shares, you have to do this by mail. DRIP investing is very private in the sense that your investments are not held in a street name for others to short etc., and so it is very confidential. It is important for you to have record of your shares in your records in case of your death so your heirs know of this...Surprises after estates have been processed can be messy.

Research every Mutual Fund You invest in by past performance

If you go to Yahoo Finance, you can type in the five digit symbol of any mutual fund and get the contents of the fund at the present time..You can also see the performance over the past five years...and how the fund performed in bad times and in good...The details will also show what the minimum amount for investment is, and for subsequent investments for regular accounts and IRA. It is important to choose a fund that matches your risk tolerance.

Fees Matter; They can consume the investment principal

Excessive fees are a plague to the beginning investor, and the novice, small investor is particularly vulnerable...There is never a case where you are not paying a fee...even if you cannot see it on your statement...it can be hidden from you to arise when you redeem or sell the investment...in open mutual fund investments there can be fees in the beginning, middle and the end or termination. It is always best to have the investment be able to be redeemed online rather than my mail..Speed matters. At the conclusion of the investment it is commonplace for the broker to make more than the investor..Remember that things go up and down, and secondly that reversing human emotions is not a simple matter...Most people buy things high and sell low...make a note..

Before You Invest a Dime, You should have completed a will

There are no exceptions to this little rule, especially if you have a family...first things first...and for serious planners, prepay your funeral or cremation too....

What is a Large loss for You?

This is very simple to determine...Say you are a married couple..Each get out a blank piece of paper....Imagine the following....your financial advisor calls and he says that you have suffered a large financial loss in your investments...On the piece of paper, put the dollar amount of the loss..Do not consult your spouse...do not look on the others piece of paper....Then when the financial advisor says, turn the papers up... Couples will notice some differences...Talk about it. As a couple it is important to create a profile of what your risk profile is TOGETHER as well as separately.

Normal Variation of Value with Equities is Far higher than you think

If you review the stock tables in the paper...you will notice that the hi and low prices of each stock. What is quite clear is that there is quite a range from high to low...and should expect that it will fluctuate 50% or 25% up and 25% down in any year...and you must get some market awareness as to where the stock is in the past year...Not every person should be in stock or equities...Some cannot handle the fluctuation and this an important area to explore before one invests.

Traditional Investment Allocation Rule

When reviewing ones investment plans, the traditional rule was to subtract one's age from 100. The resulting number was the percent of investments that should be in "equities" or stock..the remaining in bonds. So, If you are 70 yrs old, the proper amount is 30% in stock and 70% in bonds. Some current investment computer programs tout that one can handle more stocks, but their success has not been demonstrated over time. Likewise, the allocation in bonds has been questioned by many who lived through the 1970's and took some severe hits to their bonds when interest rates skyrocketed under Pres. Jimmy Carter...Cash is also nice....

The Reserve for Emergencies---comes first

My mom always used to say: Dick...you need a reserve...and I would say, "Yes, Mom, I know." If you do not have a reserve, everything can become a crisis..In fact, folks can face crisis from a simple car repair or home repair....

Dreams and Goals

It all begins with dreams and goals..The Wealthy have areas of richness in their life that they worked to develop that create a source of the wealth that persists...this is not just a matter of working hard..it can be the result of developing a natural skill, like painting or musical skill or medical skill or analytical skill such as computer programming... There is an old Zen saying that "He who seeks a thing directly, will never attain it." Those who seek money directly are called bank robbers and swindlers....all the rest use skill and hard work to some end to gain the money that fulfills their goals...Bob Dylan said it in a song...."Everybody has to serve somebody." and service to others is a very fulfilling way to achieve wealth in many areas of life.... Here is the exercise...Get a three by five card...Put your dreams and goals on it...You only will get the dreams you write down...Put the card in your left front pocket or billfold...Check daily.

What the Wealthy Look Like

Years ago when I worked for an investment firm, we got excited and planned a gathering of wealthy investors at our local office...we had a meeting and the young investment brokers pooled all their leads of prospects, and all the support staff planned to get the office looking perfect and also to cater in some fine deli food to have available for all our guests...it was scheduled for a Thursday nite in November, and as the date drew near, all of us got pretty excited thinking of all those prospects that might be making some really big investments.... Finally the day of the seminar arrived....and as the time drew near, 6PM, a few folks drove up in pickup trucks and older cars, and older couples came into the office where we greeted them and offered them some deli food....and sat down to visit with them....Some had coffee...some had tea...but nobody seemed to care for the deli food....As I looked around the office that night, all the brokers had suits on, and all the secretaries had dresses, and all the guests had casual clothes and not hip clothing at all. When the guests had left two hours later, all the brokers gathered...we were pretty depressed...What a huge bust that had been...All of the food was left on the table...it would go to waste if we did not each take some home...yes...I had deli turkey sandwiches for weeks...and one by one, we were unsure of what we had done so that nobody rich had come to our seminar... Then our manager spoke up...."Congratulations on a wonderful event...The wealthy were here tonight...You need to change your ideas about what they look like."

So You Want to Be Wealthy

Years ago, I attended a seminar by Phil Laut, the author of "Money is My Friend." He had just published the book and was making the bookstore visits nationwide, and stopped in Minneapolis for a seminar explaining the book...He began the seminar by asking the question of the group: "How many of you want to be wealthy?" Every hand went up. "Wonderful" he said..."Now I would like you to go over in your mind everyone in your life who you considered wealthy....go ahead and picture them in your mind....the details...what made them tick...I will give you a few minutes to visualize this..... Then he went around the room and asked each person to describe one person that was fabulously wealthy in their life....and they did so, with lots of detail...and with each example, Phil asked the person to dig deeper to describe the people in sharper focus...and they did...and after everyone in the room had described one person...Phil was quiet....for several minutes...then he went on...."What you have heard is a description of wealth, cruelty, greed, inhumanity...and almost every vice I can imagine....and you should consider and review in your mind why and whether you want to become such a person....Then he announced a 15 minute break so we could chat over coffee.... If you get his classic book, "Money is My Friend," you will find the answer why having a healthy relationship with money is the key thing to attaining wealth.

The Money Focus is YOU

When you go to a restaurant with a group, you all might look at the menu and then each order...what suits you....yes...you might consult a bit, but normally folks order what over their lifetime they prefer...Ditto for going shopping at the store...one picks out what one likes...and ditto for going to a dance...preferences vary quite a bit as to what is beautiful...so one makes choices...and eventually one has to live with those choices.... It is ironic then, that in the field of money or investment...on t.v. one is presented with investment ideas as if they were "good ideas" for everybody....Nothing could be further from the truth...the very basis of all doctrine about investments is that they must be "suitable" for the investor...Thus, Investments like clothing are for you...and are personal...and they can be modified over time as one gains weight etc....they are not uniforms. The little book of Money explores this "fishing pole" of investment...in that the knowledge of investing is a fishing pole that can yield a treasure over a lifetime....this book is not the fish...you must catch fish yourself with the pole...and your skill in doing so can take a lifetime...it cannot be purchased quickly...it cannot be delegated out to an investment advisor and left on the shelf...that is just an unrealistic expectation...a way of avoiding self knowledge...and a wonderful way to fail...