Investing is like the force. It can be your best friend or your worst enemy, a great ally or a terrible enemy. In most cases it is your best friend, but lets take a look at some of the most common mistakes that are made.

5. Confusing high risk and greediness …and… confusing conservatism and cowardice. This is for all of you P2P investors going after the 30% interest rates people…or those of you who probably got NASDAQ-ized in 2000. On the other side, there are all of you stashing cash under your mattress or having everything in that 3% ING savings account (but make sure and open one…see left sidebar).

4. Getting emotionally attached to a stock. A stock is not your friend, and it most definitely will not hold it against you if you sell it. Most people don’t even realize when they have fallen in love with their stocks, but you see it when they struggle to sell. If you need to sell, sell.

3. Getting under the boulder. “Do NOT sell Bear Stears, Bear will be fine” sound familiar? How about the people who bought it at half price? Then at quarter price? “How much lower can it possibly go?” The answer is, if a boulder is rolling downhill at you, get the hell out of the way.

2. Email Stock tips, enough said. Also, penny stocks, popular stocks, and stocks from internet sites that start with blog dot. If Jim on the corner says its a good stock, that doesn’t make it a good stock. Would you buy a car just cause Jim on the corner said its BA? Didn’t think so.

1. Paying high fees or expenses for load funds. Come to think of it, paying any sort of front or back loads at all. You involved in some mutual funds like this? Congrats, you are making someone rich, and I will give you a hint: its not you.

And remember ladies and gentleman: when your mutual fund manager starts complaining, tell him or her to mail all complaints to suckit@thepennysaved.com

Yesterday I had to stop and perform the painful ritual of getting gas. There’s nothing quite like watching numbers spin by…almost ten times faster than they did when I first started driving. As my car slowly sucked the money out of my wallet, I looked over at woman filling up her escalade with premium. I watched her meter climb from $50 to $80 to $100 and then I stopped watching because it was too painful. I had flashes in my head of old cartoons where character A is siphoning gas from character B is some comical way. This set off a chain reaction of thoughts traversing different paths that all led to the same thing: if you can’t beat them, join them.

Let’s face it, gas prices are going to keep moving higher until additional refinery capacity is brought on stream, and it’s doubtful that’s going to happen any time soon because there’s little incentive to do so. Why would anyone spend the money to build a new refinery when they know the end-result would be to lower their profits on every gallon of gas they produce, both on the existing volume, and any produced from the new refinery; it’s simply a losing proposition.

Most people, who drive regularly, probably fill up two to three times per week. This of course depends on the vehicle you drive, how you drive and whether you do mostly highway or city driving or a combination of both. According to the annual study, Gasoline and the American People, in 2005, American’s drove 12,375 miles, 20 percent more than 1990, consuming an average of 703 gallons of gas annually. Given the increase in the price of gas over the past five years, I wonder how much more we’ve spent to keep our cars on the road. Its huge.

Now, what if you took $3,438 in May 2002 and bought stock in Exxon Mobil (XOM), America’s largest oil company. Today, you would have over doubled your money, more than covering the added cost of fuel.

This is a clear example of what we refer to as everyday investing. Instead of moaning about the cost of a product or service that you repeatedly use, go out and purchase the stock of the company that makes it – if it’s public – and get the best revenge, in your pocketbook.

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Peer to peer lending ( or p2p lending as its commonly referred to) has been picking up steam lately and I have had a few emails from readers asking about what exactly is peer to peer lending and is it really all that useful after I posted about lending club.  Well here is a quick rundown of what peer to peer lending is and how peer to peer lending works.

Lets start with a definition (from wikipedia):

Peer to Peer lending

Peer-to-peer lending is a means by which borrowers and lenders may transact business without the traditional intermediaries, such as banks. It can also be known as Social Lending. The ripple monetary system is a software project based on a similar idea. An enabling technology for peer-to-peer lending has been the Internet, where peer-to-peer lending appears in two primary variations: an “online marketplace” model and a “family and friend” model.

The marketplace model of peer-to-peer lending on the internet enables peer lenders to locate peer borrowers and vice-versa. This model connects borrowers with lenders through an auction-like process in which the lender willing to provide the lowest interest rate “wins” the borrower’s loan. The marketplace process may include other intermediaries who package and resell the loans but the loans are ultimately sold to individuals or pools of individuals.

The “family and friend” model forgoes the auction-like process entirely and concentrates on borrowers and lenders who already know each other, as with two friends or business colleagues formalizing a personal loan. Whereas the primary benefit of the marketplace model is the “match making” aspect, the family and friend model emphasizes online collaboration, loan formalization and servicing.

Sounds interesting, does peer to peer lending work?

I have tried out a couple of the places, most notably lending club that I was using extensively and actually had a full review written up about that I ultimately had to throw away because they are now semi defunct. In my experiences with both Lending Club and Prosper (another one of the most well known sites) it has worked very well. On the lending side, lending is fairly easy and straightforward. You can have money transferred in from your bank and be ready to go in a couple days.  Default rates are a bit higher than regular lending, but a lot of this is because you can get a loan on (at least Prosper) with basically completely wrecked credit.  Whether or not anyone funds you is a whole different story.  There ARE collections agencies that are used so even on default there are odds of recouping your money.

On the borrowing side it is a little more involved but still fairly no hassle. You give out information and people decide if they want to fund your loan or not based upon the information you’ve provided and on your credit history. I never actually took out a loan but had one up to test it out.  People are generally trusting and I found it fairly non stressful to put a loan up.

Do you recommend peer to peer lending?

I actually really like the idea of cutting out the middle man: the bank.  Sure whoever is administrating things is going to make some money as a middle man but the returns are better for investors and generally the loans are reasonable for people with good credit.  There are also a lot of situations where bank’s will not make loans when it makes sense (some business ventures for example) and I find that p2p lenders are more open to lending to businesses, albeit at a higher rate.

Well, this is my first post here on TPS. I figured Id start with something we love (ok maybe just some of us)…investing.  Ive been trading for a long time now and something I thankfully learned toward the beginning is that brokers aren’t in it to make you money - they are in it to make themselves money.  They make you just enough money to keep you coming back and thats it.  So here are ten things they really don’t want you to know…

Your broker wants you to buy what makes them the most…not you
I can hear honest, hard-working stockbrokers screaming and tearing their hair out as they read this. How could any law abiding, honest individual forego every shred of decency in the name of larger commissions? Easy, just like you and I, they need to put food on the table. A bang on explanation comes courtesy a scene in the movie Wall Street where Charlie Sheen explains to his dad why he’s always broke. The overhead just overwhelms. Suits, cars, dinners, expensive cigars, golf games, etc.; somebody has to pay and it isn’t going to be your friendly broker. Always ask two questions: why are you recommending this investment and how much do you make for doing so?
Your broker is the one making the big bucks
The 1940 book Where Are the Customers’ Yachts? or A Good Hard Look at Wall Street points out that the only one making money in the traditional broker-client relationship is the person getting all the commissions. The truth is, your broker makes money whether you’re buying or selling. It doesn’t matter that the $10 stock you bought is now worth half that amount. Your adviser will convince you to sell your holdings, preserving your capital to invest another day. Once you’ve licked your wounds, your broker will return insisting the time is right to jump back into the markets to recoup your losses, which they remind you are deductible against future gains, diminishing their negative impact on your portfolio. It’s a nice story but so was Alice in Wonderland.

Diversification protects you against….good returns
Financial commentators will tell you to avoid putting all your eggs (assets) in one basket. They reason that properly matched, non-correlating assets are the best way to protect against market corrections of any kind. The average investor, in order to achieve such a level of diversification, goes out and purchases eight mutual funds from their complicit financial adviser. The only problem with this scenario is you’ve removed any potential rewards by eliminating all possible market risk. In this case, once again, only your broker makes money.

Analysts are just as clueless as you and me
Have you ever wondered why analyst estimates can be wrong so often yet investors hang on their every upgrade or downgrade, moving the price of a stock each time they revise their opinion. Investment professionals use fancy mathematical models to come with these estimates and generally, only after much schooling. It’s a given that most if not all of them are extremely bright. However, bright doesn’t necessarily make you right. When it comes to being correct about a stock, more often than not the intangibles win out. Investing is about understanding how a business makes money, not the numbers themselves.

IPOs are a chance to make anyone but you richer
Initial public offerings are one of the primary vehicles venture capitalists and other early stage financiers use to exit their investments. Every pitch for venture capital comes with an exit strategy. Without it, you have no hope of receiving funding. Private equity investors’ want to know where the end zone is; it’s human nature. In addition, investment houses make substantial fees from these deals so it’s natural for their brokers to peddle these offerings. Always remember one thing: you’re not being given a piece of the pie because of your good looks. Pass on the IPO and buy the stock after a year of trading. You’ll make a lot more money this way.

Buying on margin can bury you
Every large brokerage house advertises the availability of margin accounts on their home page. Their rates for borrowed funds seem reasonable and generally, they are. Here’s what they don’t tell you: if you buy 100 shares at $10 for $1,000 in stock and it goes to $5, you’ve lost $500. If you use margin to buy an additional $1,000 worth of stock and the price drops by 50 percent to $5, you’ve lost your original $1,000 plus the outstanding interest. Sure, it can work the other way but rarely does it happen. Once again, the only one who gets rich is your broker. Avoid margin accounts like the plague.

Investing in stocks whose products you actually use makes sense
If you were to buy the stocks of 8-12 companies, one’s you loyally support through frequent purchases (think Nike, Starbucks, and McDonalds) and whose financial statements were reasonably healthy, over a 10-year period you’d easily beat the markets as a whole and most active money managers. Why: because you wouldn’t be trading like a lunatic racking up the commissions and paying taxes left, right and center. Besides, how can a broker provide any advice if you fully understand the stocks he’s recommending. It’s much better to put you in stocks you can barely spell, let alone figure out what they do. Remember, BS and bafflegab always beats common sense on Wall Street.

Stockbrokers are really well dressed salespeople
The Charlie Sheen’s of the world loved being stockbrokers. The name was a badge of honor. Now, Wall Street gives them all sorts of fancy titles in hopes that you’ll spend excessively for over-priced commissions on stocks selected solely by the complexity of their business model. I’m being a tad facetious here but why not call a duck a duck. If it looks like a duck and quacks like a duck, it’s probably a duck. Brokers are nothing more than very good salespersons; you’d have to be to bring in $5-10 million in new business your very first year just to keep your job.

You’re really not that important as a client
Unless you bring a six-digit investment portfolio to the table, many brokers won’t even take your business, let alone give you the time of day. Don’t expect to get full-service from a full-service investment firm if you bring a measly $25,000 to the party. The investment business is all about asset gathering, not advice. Why else would Separately Managed Accounts be the fastest growing segment of the wealth management industry.

Independent investment research isn’t really independent and is definitely not unbiased
In the late 90s, conflicts of interest in investment research were the norm. The tech craze was out of control and brokerage firms and their analysts were more than amenable to giving a suspect investment its seal of approval all in hopes of keeping the gravy train rolling. As we know by now, it all came to a grinding halt. In order to placate securities regulators, firms moved to provide their clients with independent research; research free of any perceived conflicts. The problem with this solution was it simply pushed the conflicts farther down the line. If you own a research firm and look to cover two firms in a specific industry but you know the big boys are only interested in one of them, why would you cover both? You wouldn’t and there lies the problem. The conflicts may be different but the result is the same.

Its the sound of lending club landing in the trash can.  I guess I will have to replace their banner on my sidebar with a gigantic “X” because I got this email from Lending Club early this morning (emphasis mine):

Dear Jesse,

Lending Club has started a process to register, with the appropriate securities authorities, promissory notes that may be offered and sold to lenders through our site in the future. Until we complete the registration process, we will not accept new lender registrations or allow new commitments from existing lenders. We will continue to service all previously funded loans during this period, and lenders will be able to access their accounts, monitor their portfolios, and withdraw available funds without changes.

The borrowing side of our site will remain generally unaffected by this registration process; borrowers can continue to apply for loans and new loans posted after April 7, 2008, will be funded and held only by Lending Club.

Until the registration process is completed, the company will undergo a quiet period and will not be able to respond to press and other inquiries about Lending Club or the registration process during that time.

Q&A:

Q1. What about money I have begun moving, but is still in transit to Lending Club?
A1.1. If you are in the process of verifying your bank account, you will be able to complete that verification but will not be able to add new funds
A1.2 If you have initiated a transfer, the funds will be displayed in your Lending Club account balance as soon as those funds are available.
A1.3 If you have uncommitted funds, you may request that Lending Club return those funds via the same method used to load the funds. For example,
• If you have initiated an ACH to add funds, these funds will be transferred into your Lending Club account but you will not be able to lend these funds out. You can go into your Lending Club account once the ACH transfer has been completed and withdraw funds back into your linked bank account..
• If you’ve wired funds into your Lending Club account and have not yet committed these funds into loans, you can send a request to support@lendingclub.com for us to wire these funds back to you at no charge.
• If you’ve sent funds by check, and have not yet committed these funds into loans, you can send a request to support@lendingclub.com for us to send you a check by mail for the same amount at no charge.

Q2. What about referrals?
A2.1 The current referral program is terminated. If you have referred someone who has already signed up as a lender or a borrower, or if you have been referred by someone and have already signed up as a lender or a borrower, you will be receiving your referral payment within the next few days.

Now, Prosper was able to do this same process without having to stop lenders so if I were a betting man I would say that Lending Club has something else going on here. I want to apologize for all of you who I have referred to them because I know there are a decent amount. The reasons I liked them over Prosper were numerous, but I suppose I shall have to look into Prosper now.

My take is that chances are good this will kill them as a P2P lender because it is hard enough to build loyalty…when take something away for who knows how long (my guess is 1 year +) its even MORE difficult to get people back. If I know any updates Ill let all of you know.

Buy low. Sell high. Get rich. Work from home. Own a mansion.

These are a few of my favorite things.  Its also completely unrealistic yet it seems to be every investors dream.  I must get about 10000 stock tips a day in my inbox.  Then on top of those there are the “learn to be a day trader” emails.

Of course I subscribe to each one, cause everyone knows Joe12343454469696969@hotmail.com is probably the expert on day trading.  The thing that really gets me is that they must make money doing this or they would stop sending out the emails and stop making the websites.

Thats all great and all except that even without sketchy tips, day trading has some major flaws like:

-Most people that try and day trade lose money
-There are a billion government regulations that cut profits
-Even if you make a little profit, taxes will take a chunk, trading costs will take a chunk, and the booze you buy to celebrate will drain the rest (note: if you go this route, save some booze for when you dont make profit, you’ll really want it then)
-Most day traders know very little about the companies they are trading

I don’t do it, you shouldn’t do it, and you most definitely shouldn’t buy sketchy ebooks on how to do it.

So as everyone knows by now, my main retirement fund is as well as my main investment fund are both funds that follow the S&P 500 index. But the truth is, I have money in other kinds of index funds as well. Thats why I refer to it plurally as “index funds” not “THE INDEX FUND.” Though if I say the index fund I probably do mean the S&P500. If I refer to it like that, someone throw something at me (like a nasty email).

So now you are probably wondering: other index funds? But hey 11% interest over the past 10 billion years, S&P thou art my only love! Well, the truth is there are other funds that not only are just hanging around, they actually have great historical records as well. So now I’m betting you want to know what a few of them are eh?

Here are a few index funds:

Small-Cap Index Fund
-This is an index of small companies. This one is risky as hell, but its also got a ton of potential for huge growth.

Mid-Cap Index Fund.
-This is mid size companies. I tend to like this fund because it is for companies that have managed to survive long enough to become mid size but have not yet crossed the line into huge corporation. The advantage here is that mid size companies generally have a lot less dead weight than big companies, but with less risk than small companies.

Bond Market Index fund
-I dont invest in this one. Why? Bonds are for people who are either 1) not confident in the market, 2) Love stability hate taking any risks 3) old. Ok thats a bit extreme but for people that want to invest in bonds, you don’t have to pick just one, you actually get an index.

Real estate Index Fund
-You would have made massive returns years ago, now you can sink your teeth into massive losses.

European companies Index Fund
-All european companies. This can be good or bad, its really similar to the S&P500 but keep in mind, Europe is a little less business/stock owner friendly than the US.

International Stock Index Fund
-This is a great part of a diversified portfolio. Why? Unless there is a massive worldwide collapse of all markets, this one should grow consistently. Its returns have been pretty dang good.

As you can see, there are lots of different opportunities outside of the S&P500.  Go forth and invest.

I write my articles for the weekend during the week, so when I wrote my article on Jim Cramer little did I know that later that day he would talk about Bear Stearns on his program. It went a little bit like this:

Peter writes: “Should I be worried about Bear Stearns in terns of liquidity and get my money out of there?”
(Cramer’s response): “No! No! No! Bear Stearns is fine. Do not take your money out….Bear Stearns is not in trouble. If anything, they’re more likely to be taken over. Don’t move your money from Bear. That’s just being silly! Don’t be silly!”

This was while Bear was trading at about $60/share. Well Jim, thanks for proving me right.

Anyone try to buy some milk or gas in the past week? There is some bad news, and there is some worse news.

The bad news: you probably already know: its expensive as hell.

The worse news: its going to get more expensive.

The Fed is expected to announce another rate cut today to try to stop the housing and stock markets from sliding any more than they already have…there is one major problem: trying to deflate this bubble is inflating huge bubbles in precious metals (gold at 1000/ounce, really?) and commodities (I may as well be pouring filet minion on my cereal, except that now the filet is more expensive too). The long short of it is that the rise in energy and agricultural costs have led to a large increase in prices, the biggest gain in one year since 1980.

So what is going on with the rate cutting?
What happens is that as the Fed expands the money supply, money is worth less, and so it costs more to buy stuff. The good old “I” word, inflation.

I thought fed rate cuts were saving the mortgage market?
Thats the idea. The problem is that not only are the rate cuts not perculating down, but now we have hyper inflation.

Now I am by no means a hard liner on either side. Ron Paul is probably wringing his hands like a madman right now, and on the other side people are praying for the rate to go to zero. I definitely think that cutting rates needed to happen - probably sooner than they were but I am much more worried about inflation long term than anything else. Like it or not Fed, some people are going to foreclose and banks are going to have to write off a bunch of stuff…but lets not damage the dollar long term with getting crazy on this rate cutting. Don’t get me wrong, the fed has a hard job, but we have to pay the reaper sometime, so lets get it over with now.

You can do it, but its not the best idea.

I have had a few readers mention Jim Cramer. “Have you seen Jim Cramer?” “What do you think of Mad Money?”

Yes, I have seen him, and yes I have read Mad Money. Let me just say this straight out, Jim Cramer is garbage. The first time I saw him I was running on a treadmill at my health club, his TV show was on, and his voice was piercing through my music in my earphones. They ALWAYS have him on. I had to turn my ipod up to full volume, and If I go deaf, I am blaming Jim Cramer.

All joking aside, if you see it on TV, in a magazine, or in a newsletter chances are very good it is garbage. I like to review stocks and give my take about what I would do with a particular stock. I like to give both the upside and the downside to them which is just paramount to talking about it, I have never said to go out and buy any particular single stock. I treat individual stocks more like speculative fun gambling than anything.

Cramer has some good advice when it comes to money in general but his speculating on specific stocks is just that, guessing. I saw something that did an analysis of Cramers picks. They were roughly 50% correct. What really irks me is that he will tell people to

INVEST IN SOMETHING IMMEDIATELY.

Or you could take some time do your own analysis and then invest in whatever you would like, now doesn’t that sound like a much better idea?