Wednesday, December 31, 2008

Personal Net Worth... What a Crock.

I occasionally check-in on other personal finance blogs and one that I have read a few times is Million Dollar Journey. In the most recent post the author states that his net worth has increased 10% in 2008. The numbers are all there to support his claim, but if you look closely you see that the majority of the net worth is in property, almost half of the $309,000.

It's very dangerous to claim a personal residence as part of your net worth. Your residence is not a liquid asset. If forced to sell there is no guarantee you would recoup your purchase price. In the market we have today you may not even be able to sell your house. If you do happen to sell the house you have to find a place to live. Whether that be another house or a rental you have to put up some money for that.

To illustrate the danger of including a primary residence in one's net worth let's assume that this couple become unemployed in the next few months. They are in no real danger as they have $62,000 in very liquid assets, but with $265,000 in debt plus living expenses that $62,000 could easily be gone in a year.

This same sort of accounting is found on the balance sheets of every publicly traded company. There are thousands of companies that show a positive net worth because of assets that are not liquid. As the debt piles up the net worth seems to keep up as well, but when we hit a recession like we have today we find that those assets are not worth nearly what was reported when the company files chapter 11.

If you really want to have a good view of your personal net worth you need to divide your assets based on liquidity. Cash is obviously on one end and property (primary residence) is on the other. Retirement accounts fit somewhere in between as they are not worth what's on the paper if withdrawn early. Debt should also be divided into short-term and long-term. A 30-year $300,000 mortgage looks much more cumbersome on a balance sheet than $30,000 in credit card debt at 16.5%, but the credit card debt is much less manageable than the mortgage.

The bottom line is don't be fooled into thinking things are fine because your net worth looks good. All those assets aren't going to mean anything if you can't find somebody to take them off your hands, and nothing decreases prices like a fire-sale.

Wednesday, December 24, 2008

Why you should care about Bernard Madoff.

Bernard Madoff was recently arrested for securities fraud after being turned in by his sons. Madoff's fraud is valued around $50 billion. The list of those directly affected by Mr Madoff is extensive, but the majority of Americans don't seem to care because it didn't affect them. The truth is that we are all affected, albeit indirectly, by Mr Madoff's scheme.

Madoff ran the largest Ponzi scheme in the history of the United States and he did it for years. He was described by some of his closest friends as the most honest man in America. He donated millions to various charities. I don't know why he did it and I'm not sure I care, but the fact that he did do it and got away with it for so many years is unacceptable to me.

First of all how did he fly under the radar for so many years? Why didn't the SEC step in and act on the tips that we are now hearing had been coming in for years? We live in a Country where the top government officials make a fraction of what our society deems them worth. The President pulls less than half a million per year and when he leaves office he can make that much in one speaking engagement. The top SEC officials make millions in salary and stock options when they leave their posts for the private sector. Those who leave are protected by those left behind and Mr Madoff seems to have been protected from investigations from time to time.

The Ponzi Scheme in itself is a danger to society. There are many variations, but boiled down to basics the scheme is a form of investment fraud where the original investors are paid with the money from newer investors. The scheme generally continues until the investors try to withdraw their investments and find that there is no investment to withdraw from. Often this coincides with a down turn of the market like we have had recently.

What Bernard Madoff did to me was shake my trust in our financial system. Madoff's scam scares me more than anything that has happened in the past year. We live in a time where wealth is tracked by computers. Million dollar purchases are done through the internet. All of my accounts are held at financial institutions. I don't know the CEO's of these banks. I haven't met with their accounting firms. I have an account showing that I own shares of Nike, but I've never seen any stock certificates. I base my decisions on the information I read in the balance sheets. I trust that the figures are correct. I trust that Nike really is selling that many Lebron Shoes.

Millions of Americans trust others to handle their investments. How do they make the decision on who to choose. To my knowledge Bernard Madoff has always received glowing reviews by his family and friends, some of whom have lost large sums of money as a reslut of Mr Madoff's actions.

Before I was born my grandfather made a stock purchase from a woman in his home town. Shortly thereafter the stock price soared and he stood to make a large profit. He returned to the woman and nullified his purchase. He did not even want to appear to have made an insider deal. He would not have that woman think bad of him. I fear that many today would call what my grandfather did an act of stupidity rather than see it for what it was. My grandfather would not sell his integrity for any amount of money.


My greatest fear is that we as a society no longer operate under principles of morality. Bernard Madoff sold his integrity and in so doing finally gave me something to be afraid of this year.

Wednesday, December 17, 2008

Mistakes of the Past

I have no faith in Ben Bernanke. Let me say that I am not the federal reserve chief. I am not qualified to be the federal reserve chief. I'm not even qualified to criticize the federal reserve chief, but I'm going to anyway.

As I have written before, I blame our current recession on debt. Corporate debt, consumer debt, national debt, take your pick, they are all at fault for our current economic crises. Cheap money over the past 8 years is a huge factor in all that debt. Now that the economy is trying to right itself by dropping down to reasonable levels everybody is getting scared so what does our illustrius chief do? That's right he cuts rates. Did we not learn anything during the Greenspan years? Cheap money does not fix the economy. Free money does not fix the economy. Survival of the fittest fixes the economy. are we really going to allow the big 3 automakers continue their horrible business practices by bailing them out? Is it really wise to make it easier to get loans when the money to pay off those loans is still not there?

Come on America, tighten those belt straps, go to work, pay off your credit cards and if you have a job help out your neighbor who doesn't, but don't reward bad companies with poor economic policies. We've got to stop perpetuating the problem.

Tuesday, December 9, 2008

Nike

I set up a limit order to purchase Nike at $53 per share today and just before close the price of Nike dipped down below $53. Unfortunately Apple and Microsoft didn't get down to the levels where I had set my limit orders.

Yearly earnings per share for Nike since 99 (ending in May of each year) have been as follows:
0.78
1.04
1.08
1.23
1.38
1.75
2.24
2.64
2.93
3.74

While Nike's earnings have grown 500% the stock price has barely doubled in that time. Nike carries long term debt in the amount of $441 million while last year alone their net income was $1.8 billion. This is important because if the company were to face some lean years in sales and their earnings were to take a hit they would be in a very good position to pay off their debt and avoid the pitfalls we are now seeing with the big 3 automakers. Apple and Microsoft carry no long term debt, but their current liabilities are through the roof.

Nike is currently trading at 15 times earnings which is right where I like to purchase most stocks. I tend to pay more for technology companies, but not very often.

The numbers tell the story, but I don't like to buy stocks based solely on numbers. I want a company that is going to be around tomorrow and going to produce consistent returns in the future. Nike isn't going anywhere. It will definitely keep growing because it sells a product that people keep using. Even if production costs increase the Nike brand enables the company to increase prices to offset any increased expenditures. Shoes keep going up in price and people keep buying them.

Now if Lebron will just go to the Knicks....

Monday, December 8, 2008

Bad Timing

I spent much of the weekend researching certain companies with full intentions of making some significant purchases this week. By the end of the weekend I was pretty certain I would be buying shares of Nike, Microsoft, and Apple. I wasn't too high on Coke, but it was on my radar. I even went so far as to place saved orders for the 3 mentioned stocks (but not so far as to put in limit orders). As it turns out those three stocks are each up over 5% today. I'm incredibly disappointed at the rebound in these companies today as they just aren't as appealing as they were on Friday afternoon. I think I'll put in some limit orders to buy if they should drop to near Friday levels again.

Tuesday, December 2, 2008

How to Read a Finance Magazine

Most people out there are not like me. They don't thumb through the magazines at the doctor's office hoping against hope to find a copy of Forbes or Fortune. They don't look forward with anticipation for the day that the monthly Money (magazine not check) will arrive in the mail. With that in mind I have put together some thoughts on how most people could read a financial magazine.

The first thing you need to do is to open the magazine to the table of contents. Read through the titles and the one liner for each article or feature and cross out the articles that are of no use to you. If you have never owned a foreign stock and don't plan to own a foreign stock anytime in the near future cross out all articles with the words, foreign, overseas, China, Japan, Emerging Market, and exchange rate. The only time you may actually read an article on foreign investing is when the title is something like "Investing overseas for first timers", otherwise don't touch it.

There are a lot of articles about credit card and other consumer debt. If you pay off your credit cards every month do not waste your time here (unless you want to feel good about yourself). If you don't have kids stay away from any article about saving for children's college. Sure you may have kids in the future, but the tax/finance landscape will change and your time can be much better spent now.

Now after you have eliminated the useless articles start thumbing through the magazine. When you reach an article that may be of interest to you flip to the end to see how long it is. My general rule is that if the article is over 4 pages it has to be something I am very interested in (Warren Buffet for example). Anything that takes more than 4 pages to explain is not worth my time.

After starting into an article don't be afraid to trash it. If the tone of the article turns from what you thought it was and you are getting bored stop reading. On the other hand if the article is intriguing but difficult to understand don't be afraid to read it again or save it for later.

I like to tear up my magazines. I usually don't find more than 2 or 3 articles in an issue that change the way I think, but I will want to return to those 2 or 3 articles at some point in the future so I tear them out of the magazine and throw the rest in the trash. I've found that I can never find what I'm looking for if I save entire magazines, but if I save just the articles that stick out to me I can easily find them (so long as my filing system is in good order).

It's not a cut and dry system but it works for me.