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Archive for the ‘Investing’ Category

Will I strike Gold with Gold?

Monday, August 2nd, 2010

 All terrible puns aside, since the dawn of time (cue melodramatic music), people have been enamored with the beauty of a certain tannish looking metal.  In fact, this particular metal gives its color its name.  Thats right, we’re talking about gold (although if you had guessed silver, you get points for trying and lose points since I said tannish).  All throughout human history there have been mad rushes everytime gold is disovered somewhere.  The new world, California, hell even Alaska.  The point being it has been a valuable commodity for a long, long time.

Even right now, whenever there is a hint of financial instability, people flock to gold because it has always been a hedge on inflation and currency crashes.  As most of you know in the past I have liked gold, but been skeptical of how fast it has increased in value.  Well, I am just going to say it now; I give up, I don’t think its going to fall.

That being said, there are pros and cons to investing in Gold.  Lets start with some of the pros.

Pros of Investing In Gold
-US government spending is out of control and the dollar is likely to be weaker and weaker as we get further and further into debt.
-Inflation has slowed down but is likely to increase going forward.
-Gold will always be worth something, unlike many of the “intangible” things we invest in.
-It has industrial uses

Now a few of the cons:
-It does not ‘grow’ in value and it cannot create wealth, like investing in companies can.
-It maintains purchasing power, but does not grow it.
-Its hard to predict prices so it is not good for “playing the market”

The bottom line:
Gold is just like anything else, it is good in moderation.  It should be part of a balanced portfolio and if you do not own any at all, you should. There are local places you can buy gold in your town but there are also online places where you can invest in gold.

Top five investment mistakes that I see over and over (and over…)

Monday, March 15th, 2010

Investing is one of those things that people think is sexy.  Nice suit, nice shoes, clean cut, tall athletic people living the huge lifestyle in New York.  Hey that sounds like a damn good time!  The truth is, its not easy, and those poster models down on wall street aren’t a hell of a lot smarter than you or me.   They think they are, but I promise you can do as well as any of them can with the exception of a rare few.  Now stop right there, I know what you are thinking.  That doesn’t mean jump in and throw your life savings into an investment account.  Read this first and lets cut off any of those newbie tendencies before they have a chance to take hold.  Mistakes to avoid:

1) Not paying off debt before investing.
This one is easy.  If you are paying somewhere in the realm of 20 percent on credit card debt, and averaging a great 15 percent return on your investments, you’re paying out more money in interest than you’re earning on your investments. Not to mention taxes, broker fees and all that other stuff that comes out of that 15%.   Get rid of credit card debt first unless you can get a crazy low interest rate (like 0-5%).

2) Following tips
I’m not just talking about penny stock emails.  I’m also talking about friends, family, and anyone else who promises you they have a tip to make you rich.  If you can make me rich why the hell aren’t you already rich uncle Ricky!?

3) Impatience
Im as impatient as the next guy, but investments take time to grow.  Too many investors make the mistake of getting easily frustrated and selling quickly. Don’t be a slave to minor fluctuations in the market.  A great example is my 401k.  I look at it, get ready, once a year.  Thats right, once per year.  I know I have things setup correctly, I know I am diversified, so I do not worry from day to day how it is doing.

 4) Being to risky or too cautious
Didn’t your momma ever tell you moderation is key?  Or was it don’t drink on weekdays?  Well both are good bits of advice, though as you get older the latter is self apparent while the former becomes cloudier.  Don’t dump all your money into one stock.  In fact, don’t dump all your money into stocks (bonds, gold, money market).  On the other hand don’t get a portfolio full of bonds and wonder why you aren’t rich when you retire.  If you are young, the majority of your investments should be in stock, hands down, but spread it out, or grab an index fund.  If the market hasn’t grown by the time you retire Mr. 30 something, why then, the country has probably collapsed and there is likely bigger trouble you are worrying about.

5) Pulling out
If, by chance, you manage to make a lot of money, or some money, or any money, you might be tempted to pull out completely and reap your rewards.  Well, don’t.  Reinvest, keep gaining, it will be worth it in the long run.

Oh and when you all get rich, don’t forget to tip your blogger…

The theft of a house the size of Colorado (including your money)

Thursday, January 22nd, 2009

It seems like everytime I turn around lately there is some wall street mongrel being arrested for fraud.  Sound familiar? Bernie Madoff stole 50 billion from investors.  To put that in perspective, in the cost per sq foot it cost to build my house you could build a house the size of colorado.  No kidding, the entire state.

Colorado house

Sorry Kansis, NM, and Utah we borrowed 20 extra bill to build on you too, since the government gives out billion bills like candy these days.

Whats the moral? Well we have a few of them for you:

The experts know nothing more than you do
Have you ever wondered why the so called expert’s 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. I won’t even start on my Jim Cramer rants, since you all know what I think of him.  They use really complicated 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. Then again a lot of them are not.  Of those that are extremely bright, how many actually know what is coming?  Zero.

Your broker recommends what makes them the most money
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 or in a lot of their cases, a yacht in their marina. 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. They have necessities such as cars, dinners, suits, boats, expensive cigars, golf games, crown XR,  et al that somebody has to pay and it isn’t going to be your friendly broker, it’s going to be you.

The overwhelming point is this: there is no magic formula for investing to get amazing returns year after year and any broker that tells you there is is a liar and a thief.
Brokers are looking out for themselves, and any that promise returns that seem too good to be true I can promise you actually IS too good to be true.  Don’t allow yourself to get swindled.

We are NOT on the brink of financial apocalypse and Jim Cramer is a fool

Wednesday, October 8th, 2008

I have written in the past that Jim Cramer is scum and yesterday was no deviation.  He said on the air yesterday for people to sell their investments and stash any cash you need for the next five years. There is no question the financial market is essentially in ruins right now but there are a bunch of reasons not to pull out.

1) Its dangerous – for you, for me, for the entire country.  A run on the stock market is just like a run on anything else: it disrupts the economy and is bad for everyone.  If I take all of my money out, it will drop and further push Joe to take all his money out which creates a bigger drop and so the cycle continues.  There are some things in place to make sure there is not the kind of massive crash that happened on black Tuesday but essentially our biggest enemy right now is fear.

2) Regardless of what happens right now, the market will go back up.  This is not the case for each individual company, but assuming you have diversified investments and are invested in index funds, you will see brighter days in the future, I promise.

3) As of this writing, the dow is under 10k and you and I have both already lost a massive amount.  Unless there is a total and complete collapse of the markets I think the probable bottom of the market is not too far off.

Let me reiterate: Despite what you might hear, we are NOT on the brink of financial apocalypse.  History will not repeat itself.

When the risky lending of the 1920s happened, there was a striking difference between what they were borrowing against and what the risky lenders of today have borrowed against.  I was fairly shocked to learn that in the 20s the risky loans were borrowed against STOCK.  Thats right, something that has the ability to go to absolutely zero worth.

Now lets contrast that with the ridiculous lending thats happening today.  The risky loans were put up with REAL ESTATE as collateral.

Lets put two and two together: we cannot replicate conditions leading to the great crash of 1930 unless real estate value goes to absolute zero.  This has never in history happened….quite the contrary land is the one thing throughout history that has held some sort of value.  Though the real estate is overvalued and correcting, it will not go to absolute zero.

Another huge difference is that back then there were absolutely no insured deposits.  There was no FDIC.  People that had any money in banks and were unable to withdraw it lost everything.  Thats simply not possible today.

There have been tough times before (Tech crash anyone?) but do not panic.  Stay the course and stick to personal finance fundamentals: reduce debts, save, invest, and keep your head above water.

What the hell should I do with my money?

Friday, August 8th, 2008

If I had to characterize the state of the market right now I would say its sort of like Gary Busey. A sort of unpredictable downward spiral that occasionally shows signs of its former self only to slip back into some sort of awkward state of existence. Luckily for us, unlike Busey, the market will recover, its only a matter of time. In the meantime it has left a lot of people asking what do with their money.

What not to do with your money

-Invest in massive amounts of penny stocks. I have a friend who invests $20 a month in Penny stocks. Though its amusing to own 20,000 shares of a stock, its not exactly a big investment plan for real investing.
-Put money into non-insured banks.
-Buy low end mortgaged backed securities.  Here is an awesome graph I made that sums up my guess:

mortgage backed funds

What to do with your money

Here is the easy part: keep investing. A diversified portfolio right now will make you more in the long run than buying at any other point. Why? Its cheaper. Absolutely positively do not jump ship. Jumping ship right now is basically akin to deciding to jump ship in the middle of the ocean.

I know Im beating a dead horse but for those you who continually are searching on google “401k losing money” rest assured, if you have your money in something decent in the long run you will be ok. In fact, you will be worse than ok, you will be excellent.

Top five investment mistakes

Wednesday, April 23rd, 2008

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

Sick of gas costing an arm and a leg? Dont get mad — get even

Thursday, April 17th, 2008

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 – the basics of P2P lending

Saturday, April 12th, 2008

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.

Top ten things investment houses get pissed if you know

Friday, April 11th, 2008

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.

Welp, so much for Lending Club (whoosh) Whats that sound?

Tuesday, April 8th, 2008

lending club trashIts 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.


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.