A10, Stock Trader Dude

Keep what you have and create what you deserve? It’s not Suze Orman bashing day, it isn’t… it really isn’t but the five laws of money that she promotes aren’t much of anything. You might call them focus points, or reminders, but not laws of money. She makes it sound so formal. Here’s what the book offers:Truth creates money, lies destroy itLook at what you have, not at what you hadDo what it is right for you before you do what is right for your money (People first, then money.)Invest in the known before the unknownAlways remember: money has no power of its ownThere are relatively few authors that really grasp the concept of laws of money… and Suze Orman isn’t one of them. She doesn’t understand or develop a thorough long-term view of money matters or economic development. The problems of today aren’t necessarily the problems of tomorrow and the solutions of today aren’t necessarily the solutions to future problems.

Chapter three is Wipe out your debt and the author recommends paying off your debts since it should be obvious that you are paying more in interest than any of your investments are generating, and if you don’t have any investments, the idea is the same, the return you are getting is what you are saving in interest charges. Chapter four, Your safety net, and it states – You buy life insurance for just one reason: to support the people who depend on your income if you die prematurely. That’s it. Everything else is noise.

Prepaying your mortgage is an investment and I can tell you exactly what the return on that investment will be. Your gain is always the same as the interest rate you pay. So when does the book recommend paying early would be appropriate?

1. In middle age

2. In a flat housing market

3. If you inherit money (prepaying reduces your cost of living)

4. If prepaying looks like a good investment

5. To shorten a long-term mortgage

6. If you just hate debt

Add 1/12 of a payment each month to what you are already paying.

I see a number of problems with the above. While you may be building equity faster in your home, there is no inherent return associated with your home equity investment and you reduce your tax deductions. If prepaying is your preference, without an audit of how your additional 1/12 payment is being applied – you don’t know if it is going directly to the principal loan balance or how soon that portion of the payment is being applied. Prepaying your mortgage doesn’t maximize your leverage. The author doesn’t understand the pitfalls of traditional IRA and 401k account investments, nor the tax consequences compared to alternative investments and tax deductions that can be duplicated with a mortgage. An interest only mortgage can be your best friend when properly utilized.

Only a few things work and they work really well. If you set up a system that runs automatically, you can’t fail. Success comes from starting right, then keeping a hands-off approach. You can’t see the future but if you’re saving money steadily, that doesn’t matter. All that really matters is getting more out of life.

Chapter seven, Better investing, I like how the book ends. Good news: The smartest investments are the simplest ones. Ignore it all! You don’t need 99.9% of what Wall Street is selling.

How to apply time-tested principles to create, manage and build personal wealth. Wait a minute, principles aren’t secrets; here we go with another thick book to waste time… but I’ll spare you a few hours.

Seven main reasons people fail

1.      Procrastination

2.      Failure to establish goals

3.      Ignorance about what money must do to accomplish those goals

4.      Failure to understand and manage credit

5.      Failure to understand and apply tax laws

6.      Failure to properly prepare for the unexpected

7.      Failure to develop a winning financial attitude

The good point is, those issues need to be addressed and if you do that you’ll be prepared to win by not losing because you started on a good foundation. As for the principles:

1.      Set goals

2.      Pay yourself first

3.      Harness the power of time

4.      Diversify your investments

5.      Manage your credit wisely (good debt)

6.      Safeguard your future (insurance)

7.      Seek professional guidance

It’s interesting to see what a professional will say in a book considering all the hucksters out there that discuss investment and stock market wealth along with self-proclaimed experts that don’t have the credentials that Mr. Schwab has. Here’s what his guidance is:

1. Invest for growth

2. Divide your portfolio

3. Know yourself

4. Keep your perspective

5. Stay informed

Taking care of the basics:

1. Create a financial safety net (savings of 2 months to 6 months of living expenses)

2. Make sure you are adequately insured

3. Contribute the maximum amount to an IRA and 401(k) or 403(b) plan

4. Pay yourself first (Make it a habit and start with at least 5 to 10 percent of your gross income)

5. Get started now

He discussed being 24 years old and going into high-growth stocks because he wanted to get away from the number zero, as in where he started from, at a rapid rate. But he does stress that before you invest, handle the basics. Your personality plays an important role in the kind of investment plan you develop. The two most important aspects to look at are your time frame and your attitude toward risk.

A penny for your stocks:

When you buy penny stocks, you’re seldom buying quality, something that’s crucial in stocks. Schwab claims that although penny stocks rank at the bottom in terms of quality, people get involved because they act on a hunch and believe these stocks look like easy money can be made – both bad reasons to invest.

If you include only US stocks in your portfolio you are bypassing nearly half of the world’s stock market opportunities.

What armchair investment strategy works? Here are the eight criteria for a near-perfect investment strategy:1. The strategy must be easy to start.2. The strategy must be easy to maintain.3. The strategy must be easy to understand.4. The strategy must be inexpensive to implement and maintain.5. The strategy must be tax-efficient.6. The strategy must be widely available.7. The strategy must have a lot of history to judge it by.8. The strategy must make a lot of money.The author claims there is only one way to do that which meets all the criteria – indexing. This book could have been one page long: it simply suggests buying an index fund. The author cites Warren Buffet as saying that it is the best approach for 97 percent of all investors. Why does the author think buying an index fund is a great idea? Well, he cites that from 1995 to 1999, nearly 85 percent of all mutual funds that were set up to beat the S&P 500 failed to meet that goal in any particular year. Eight out of ten mutual funds can’t beat the market. For the ten-year period ending in mid 1995, the S&P 500 index beat 83 percent of all actively-managed general stock market mutual funds. Here is what the author is missing, from a fundamental standpoint, over the very long term, like a thousand years, all investments have done poorly. Also, there are ETFs in addition to index funds, and ETFs might be better for lump sum investments. More importantly, after a boom period, the S&P 500 doesn’t do very well and it can stagnate with low returns for seventeen years for example. So, while index funds are great, why limit yourself to the S&P 500 when other world stock markets may see better growth or the bulk of the growth over the next fifty years? So, while it is important how you invest, the primary factor in determining your investment returns is what you invested in. For most folks, investment grade life insurance contracts may offer the best blend of tax benefits and stability, as you can opt for a guaranteed rate of return so that you never lose, with or without it linked to the S&P 500 index. And in case you’re wondering, no, I don’t sell insurance. Most of these books have a fancy way of making a point when one page will do fine… so while these criteria are fine to evaluate an investment, no one can see out fifty years and know which investment will be the most promising.

There are plenty of books on making money by men and women who haven’t made much. That’s exactly why I like this book by J. Paul Getty, there is no disputing the author’s credentials. He wrote it to convince young businessmen that there are no sure-fire, quick-and-easy formulas for success in business, that there are no ways in which a man can automatically become a millionaire in business.

And specifically when it comes to stock investments he discusses why the average person will not attain wealth in the stock market. The average person may risk a little of his or her capital and if the investment doesn’t work out the person loses a little. It is precisely this kind of risk that everyone can take that negates the creation of wealth. If the investment works out, the gain is usually little. You would have had to invest a substantial amount in a superior asset/stock in order to benefit from the movement of the share price and this is the kind of risk that few are willing to accept.

An extraordinary portfolio, even on an ordinary income, by following one commonsense investing strategy… Well, before you get excited, let me explain what the author is advertising: saving your money and putting it in an index fund. Is this a good strategy? There isn’t anything wrong with saving money and putting it into index funds but there are a number of errors in implementing it. The author fails to understand the risks of tax consequences (which will reduce the expected millions), and fails to understand that there are cycles in investments, so why would you want to be invested in the US market, with an S&P 500 index, when other areas of the world, such as the Asia Pacific region, may have more potential over the long-term for growth? Why limit yourself to the US market that could very well under-perform for seventeen years, for example, as it has before after a boom period? The author lacks a filter on understanding what is and what isn’t a good investment. Investment grade life insurance can offer a stable return, or linked through an index, where you get the upside in a good market but not the downside. This is the way to go if you want index exposure and you are eligible for tax free retirement income with investment grade insurance contracts. The bonus is that should something happen to you, you also have life insurance, so your family will have tax free income to provide for themselves. That’s going to be a lot better for your dependents than your IRA or 401k, especially if the death benefit is high. So while I don’t see this book as being valuable you still may be curious so here are some notes:

Five steps to financial freedom (I’m getting tired of them calling it that)

1.      Max out all tax-deferred savings (I say, may or may not be the best choice, you can also get another mortgage or refinance into interest only and get the same or higher tax deduction benefit)

2.      Pay yourself first

3.      Invest automatically – and benefit from dollar cost averaging

4.      Use the armchair investment strategy (nothing more than buying an index fund)

5.      Start today – put the power of compounding interest to work for you