Two Market Themes of the Day

There are rumors of mutual funds who had difficulty selling off their portfolios for stop-loss reasons mixed with whispers of stock bargain-hunters out for undervalued investments in the market today. It's going to be difficult to see who is going to win out (ie. big loss or big gain today), but if the Japanese Nikkei is any indication (falling 500+ points), the stock market isn't out of the clear yet.

I expect a lot of small-time investors to be holding today, while long-term investors, if they haven't already done so, try to liquidate and keep at least some of their previous year's gains. After-markets indicate a rebound in confidence for the tech sector.

OUCH!

Wow, the Chinese Markets tank, consumer goods sales decline, and Greenspan is off making comments about the economy. Mix that in with 8 months of up and up markets, and you get today. 3.5% drops across the board, with some stocks seeing 5-10% drops. Yuck.

IF you had money in bonds or savings accounts, you're feeling really smart right now.

China is killing the market today

What more do you need to know?

$24 billion utility bill - What a gaffe!

Recently, I heard about residents in Weatherford, Texas who were handled huge bills, ranging in the billions (Story here). The man in the story reported he was charged $24 billion for that month's electricity. After seeing this story, I set out to see just how much electricity that would be.

So lets consider it by the hour:

There are 30 days in a month, times 24 hours in a day, which is 720 hours.
That's about $30.5 million in electricity per hour.
I researched the cost of a Kilowatt-Hour (kWh) and discovered it was around 10 cents per kWh.

So we're talk about 305 million kWhs. But that number is too big to mean anything. I found a great page for household appliance's energy usage (link), but the energy usage from that is too small.

A typical fast car has about 350 horsepower (HP) which is about 261 kilowatts of power. So running that same engine for an hour, we obtain 261 kWh. So using this comparison, this man in Texas was consuming the same amount of electrical power as that generated by 1.5 million sports cars in the span of an hour.

Mid-Day Market Thoughts

The market is pulling back, but I believe due to increasing oil prices, and potential profit-taking on the tech side.

Market Thoughs

Markets will open strong, in the midst of no news on the inflation or debt front and a number of potential big buyout deals going on, but oil continues its rise, potentially dampening the market. Also, Susan Bies of the Federal Reserve will speak today, but its doubtful if any market impacting news will be released to the public.

Buying a Car - A Consolidated Research Guide

I am in the market for a Nissan 350Z (Read my original post). I know I have to pay a premium for a sports car, but I'm NOT willing to pay a cent more than necessary. This caused me to search the web for some information.

From what I gathered, there are 3 price points to any car purchase:

1. Manufacturer Suggested Retail Price (MSRP) - a price made up by the manufacturer for the car, based loosely on its real cost
2. Invoice Price - the price the dealer pays to get the car
3. Net Price - the price the dealer actually pays after taking any incentives from the manufacturer, such as holdbacks, sales incentives, financing incentives, etc.

So to give an example from my own life, I contacted two dealers for the specific 350Z I wanted. I knew MSRP was $36,500.

They immediately quoted me a price of $34,000, with the suggestion that $33,000-$33,500 was their invoice price. The difference from price point (1) and (2) was 8%.

Next, I considered the holdbacks for Nissan (a complete list of manufacturer holdbacks can be found here). Its about 3%. However, since the holdback is pure profit when you special order a car, I had to recalculate their invoice point.

I also figured in sales incentives and bumped MSRP to Invoice as actually 10%.

This provided me a net price of $31,864.50. Armed with this number, I will be going into negotiations next week to see if my calculations hold out.

Savings Calculator

In one of my first posts (Some Realism), I talked about my million dollar goal, and then the sobering realism that 8 years may not be enough to reach that goal. I realized though that is would be helpful to give to the world that calculator. You can download in here (32K).

The Excel sheet attempts to forecast a regular mutual fund or IRA account, assuming annual contributions that are a percentage of your salary and bonus. It also assumes your salary will increase every year, and that you will receive a promotion every 3 years. After your 6th promotion, I decided to make the promotion every 6 years.

You will need to customize a few variables to yourself. Of note are your starting/current salary, what your annual bonus is as a percentage of salary, and what percent of your salary and bonus you want to save. For more advanced users, you can also manipulate your
annual salary increase, salary increase due to promotion, and investment returns.

The sheet keeps a running total for the next 45 years, and where the "Net" figure goes from red to green is the first year you achieve a $1 million.

Going to be a big day for tech

Update: Nothing like being flat wrong, but then again, what I expected for oil to do, it didn't do. Oil went up, killed the tech sector, and made my predictions go to smithereens.

Yesterday's consumer inflation warnings caused a big panic, which will be corrected for today as investors see cheap stocks. Oil prices are down, and Google's big announcement into the world of Business Applications will have a huge impact on the Tech sector.

Expect to see Google go up $6-$10 and Microsoft down probably $0.50-1.00.

Disclaimer: Please understand all the risks of stocks before buying. Also, please understand this blog's disclaimer, printed at the bottom of the page.

Eating Healthy = Higher Networth

One of my new year's resolutions was to begin eating a lot healthier than I have been. It was a three-pronged attach plan: 1) start counting calories, 2) stop snacking on chips, cookies, etc., and 3) start going to the gym more than once a week.

A surprising result of this resolution is that I've begun to spend less at the grocery store. Before, I was probably buying about $30-50 of groceries a week and spending another $40 a week eating out.

I'm eating in more now, which you would think would shift the cost to the groceries side. Yet, by cutting out the highly-processed foods like potato chips and ice cream, my grocery bill is about $25-40 a week and I'm only spending about $30 a week eating out.

At worst, a cost comparison says I'm paying just as much, but I'm much healthier. At best, I've reduced my spending by about 40%!

Student Loans - Pay them off or keep them?

I hate to follow a post about the virtues of debt with a similar post, but this occurred to me today, as I paid $150 toward my student loan debt, even though no payments are due for another 8 months.

Why am I paying ahead of time? It is human nature to not want to owe anything to anyone, especially money. I had this instinctual urge to see my debt number go down, so I went ahead and pressed the "Send Payment" button.

At a time when the stock market is making 8-12% gains a year, and the number of low-cost index funds that exist, maybe I could have made better use of that money? After all, at that rate invested in a stock market index fund, my $150 might be worth $160 in 8 months.

And then I realized it.

I can rationalize percentages all day long, but when it came down to it, such a small dollar amount of return just wasn't worth the instinctual guilt I felt, every time I looked over at my debt numbers.

And so, I have a new rule. Any time I'm not using cash to pay debt or save, I need to get at least $100 back, regardless of the return rate, or else it just isn't worth the guilt.

Can debt be good?

The classic answer to any finance question is always, "It depends."

Consider Chief Clancy Wiggum (PS - I love the Simpsons). Clancy probably makes about $55,000 a year, plus the fringe benefits of all-you-can-stuff donuts and coffee. He's faced with a tough decision: He wants to join a gym, but gym membership costs $200 / month, and he'll need to pay for 12-months up front.

He can: A) Save up $2,400 and pay it in cash, B) Put it on his credit card with a high-interest rate, or C) Find some mix of A and B.

If he goes with A, it can take quite a while before he gets that much money, and in the meantime, he may end up spending that money for other things.

If he goes with B, he runs the risk of maxing out his credit for what isn't necessarily essential, and paying high-interest rates.

If he goes with C, there is a lot of headache time, as he figures out what he can do. But, it gives him time to weigh (no pun intended) how much time he is willing to wait before getting the membership and how much the credit cards will charge.

But, Clancy may even have a plan D. Say Homer Simpson finally comes up with his killer invention that will make the family millions, but he needs a small loan to get it going. Homer goes to Clancy and says, "Hey, I'll pay you 20% APR for $2,400" If Clancy has a good credit rating, his credit card APR will probably be about 16-18%. Now Clancy can loan the money, go to the gym, and still make money off the 2-4% APR difference!

It's called making your money work for you. On a side note, I once interviewed with a wealth management division of a major bank. In our discussion, we talked about how much money it would take to before the bank will do business with you. Their lowest rank started at $100K cash.

I mention this because many of these rich folks have their money fully invested in the bank, and actually take out loans to pay for items such as cars and homes. Many times, these people are making 10% returns on their money. When they need money, the bank loans it to them for about 7%, so the customer is still making a 3% return on the money he spends (the difference between what he has invested and what he borrows)!

To answer my initial question: Debt can be both good and bad. Having a little is always good; having too much is always bad. Being debt-free is worry-free, but you're not putting your money to work.

Washington's Birthday

That's today, which is keeping markets closed, and helping to keep some from going to work or school.

Read more about it here.

Sunday - You say you want a credit card...

Discover Card recently sent me this offer (picture pulled from their website):












On its face, it seems like a great deal. 0% APR on purchases is like free money! 5% on Get More purchases and 1% Cashback on other purchases seems like making money off of spending money.

But delving deeper, one begins to see the devious nature of credit cards.

• 0% APR on purchases is probably the best part of the deal. For probably the next 8 months, you only have to pay the minimum on your bill and not accrue and interest. This rate jumps to 12%, applied retroactively, if you don't have it paid off by the end of the deal.

• 0% APR on balance transfers seem like a good deal on consolidating your credit. They'll even give you a year's time interest free. But like purchases, your rate will jump to 20-29% if you haven't paid it off, all applied retroactively. Also, they'll charge you an additional fee for the initial balance transfer of 3% of the transfer amount, up to $29. This COULD be worthwhile if you have over $1,000 on high-interest credit cards and want to move that debt around temporarily.

• The 5% Get More deal is by far the most confusing. Every 3 months, Discover changes what type of stores you can get the 5% deal from. Sometimes its gas, or restaurants, or retail outlets. Who has the time to remember all that? Nobody. And that's what they count on.

• The 1% Cashback is just as shady. If you read carefully, its says "UP to 1%". The first $1,500 you spend, you only earn 0.25%. The next $1,500 you spend, you only earn 0.50%. Only after spending more than $3,000 in a year do you get the full 1%. Contrast this to most Chase and Citi Bank Cards that offer you 1% immediately.

• ex. You put about $500 / month on your credit card. This is $6,000 a year. None of your purchases every make the 5% Get More criteria because it's too confusing. You earn$3.75 ($1,500 x 0.25%) + $7.50 ($1,500 x 0.50%) + $30 ($3,000 x 1%) = $41.25.
  

• ex2. In comparison, if you had 1% to begin with, you would earn back: ($6,000 x 1%) = $60.00. Or a $18.75 difference! That's two movie tickets and all you've done is selected a credit card correctly.
  

What are Saturdays for?

It's time to sit back, relax, and rifle through your credit offers for the week.

Remember, an aspect of your credit score is the amount of credit you have available to you, so it's not a bad idea to open a credit card account if you haven't opened any other lines of credit lately.

Doing this has two benefits:

1. This will decrease your overall debt to credit ratio, if you had any debt before. Decreasing this ratio will increase your credit score.
2. Having another credit card also provides another way to measure your credit worthiness, which again adds to your credit score.

Warning: If you have been opening a lot of lines of credit lately, then don't do this. One way your score goes down is when you have sudden periods of excessive credit checking, suggesting you are looking to get enough credit to do something big.

What is a fund and why do I care?

On the Street, there are many different ways to put your money to work for you, referred to as investment vehicles. One such type is a fund, where people's money is pooled together to trade on a certain strategy, and the return to divided amongst each fund contributor according to how much they contributed, after a small management fee.

Why do you care?
If you are like most people, you don't have millions of dollars to invest nor do you have a lot of free time on your hands to watch and play and the stock market. Funds hire people who specialize in watching and playing the stock market.

When you have money sitting around, consider that every day it sits, you're actually losing money, due to inflation. Funds are the ideal way of knowing someone is managing your money without you worrying about it day to day.

How do you pick a fund?
Funds have two basic strategies: active and passive management

Active management is where the fund employs some sort of strategy, ie. we only buy stocks that have been winning in the last 10 weeks, and constantly changes what they owe to match that strategy. Such management allows for the possibility of really high returns, but also has the downside that you could lose all your money. In general, these types of funds all have high management fees (between 3-5%) of your money a year.

Passive management on the other hand is typically a strategy of indexing. What is indexing? Essentially buying every stock in proportion to their size on a certain criteria and holding it, ie. indexing all stocks on NASDAQ. A lot of people consider this a "lazy" approach to investing, but is actually very low in terms of risk, and most research show that the average passively managed fund outperforms the average actively managed fund. Of course if your criteria tanks that year, so will the fund.

What different kind of funds are there?
You're heard of hedge funds. They are in the news a lot, because they can either may 50% a year or just belly up. However, if you are reading my blogs for information, you probably don't fall into "professional, institutional or otherwise accredited investors"who are allowed to buy into hedge funds. What's left?

Mutual Funds - Click here to read an excerpt from Wikipedia about how to select a mutual fund.

Prosper.com - Read the new American gamble

After reading about Prosper.com, I am very intrigued by their concept. Their business concept is to match up borrowers and lenders, and make a small fee when they get together, a total of about 2%. To make up for this fee, the average loan gets about 7.5% APR, which is just about 2% over what banks are willing to pay you for your money.

However, consider that a CD or savings account at a bank are essentially riskless, whereas this site has no real guarantees. They have available loan data to download. I obtained it and ran a quick analysis of the loans. I discovered quickly that there is no correlation between credit rating, loan interest rate, borrowed amount to the likelihood of getting your money back.

Edit:
After considering it further, I realized that although there are no direct correlations, a 3% default rate still meant that 97% of all loans were being paid back at a pretty nice return. Given a good diversification of loans, this could actually be a worthwhile investment, although the money you put in will have to money you are willing to part with for 3 years.

How I Pick Stocks

I wanted the chance to inform all readers about how I form opinions about stocks. You will see me more focused on the technology sector, since this is my area of expertise. In general, any reasonable analyst know that the only way to "beat" the market, is to have some sort of advantage. Typically, this advantage is in knowing more about your industry sector than outsiders.

Inside technology stocks, I will most often discuss companies I feel are on the right track with their R&D or acquisition strategies. I will NEVER post about companies based on some arbitrary "technical analysis" numbers, because I think technical analysis is pretty bullshit. (Scroll to the bottom of this post if you want to know more about technical analysis.)

I believe in the efficient market hypothesis (EMH). This is not to say that you can't make any money on the stock market. But it does say, without any advanced (unknown to public) knowledge, you will not make excess returns or money from the stock market.

As such, I my stock analysis rests upon fundamental analysis, or the underlying reasons for a stock's worth. Remember, a stock is a portion, or share, of a company that you own. You are entitled to the company's value in the proportion that you own. Therefore, the equation for a stock's value is:

Company's Total Value / # of shares outstanding = Price per share

Much of the analysis you see rests upon how the company's total value changes. What makes that number hard to calculate is that a company's worth is not just the value of computers, desks, products, etc. that is currently owns, but also the future value of the company, such as the intellectual worth of the employees, inventions being developed, etc.

I will most likely not do a rigorous calculation of company total value most of the time I suggest a stock. This is because a) It is time-consuming and b) There are plenty of analysts that do. What I will add is my own opinion based on my technical and financial background.

Also, just remember that there are NO necessarily bad/good stock picks. You have to consider your portfolio as a whole. Making a bet on one thing is never good. Diversification is always key.

Finally, read my posts for ideas. Don't read my posts as a way to get rich quick.

Technical Analysis
A little more on technical analysis - it is the "science" of reading the historical prices of a stock and figuring how its current momentum. Essentially, you are looking for indications that either the stock is rising very fast, slowing down, falling, etc and you hope to predict future prices from looking at past prices. As a believer of EMH, I believe this type of analysis is inconsistent with EMH. More importantly, since this analysis is so simple that any 5th grader can tell you when a stock seems to be going up or not, I have to assume that there are no excess returns you can gain from using it. After all, if everyone's making money from it, where is that money coming from? Remember, when you make money, someone has to lose it.

Great Week for the Market

With Bernake saying we're in the clear for inflation, oil prices falling, and corporate spending on the rise, it will be another great week for the stock market, especially for tech. If you're looking for something to buy, the sector is the place to go.

Check out: Google (GOOG), Sun Microsystems (SUNW), Yahoo (YHOO), Nortel (NT), Cisco(CSCO)

Disclaimer: Please make sure you understand the risk involved in buying stocks, and weigh your ability to accept loss before considering investing. There are no guarantees in life, and the stock market is no different.

Another Strike Against My Goal

As I get closer and closer to my first job, I've realized there a lot of expenses involved. Some of them are necessary, ie. suits, computer, etc. Others are just because I suddenly have more money that I've ever had before coming to me, ie. car.

Oh yea! But not just any car. Just like any 22 year-old, in the words of Ricky Bobby, "I wanna go fast."

I've got my eye on this beauty:
the new 2007 350Z.

MSRP with the options I want? $36,500. It's red cause its going to decrease the speed at which I reach my goal.

Now why I do tell you about it? Well for one, its a really cool car. But, more to the point of my blog, is to discuss the financial considerations that go into a car purchase.

When it comes down to it, cars are terrible investments. Few cars appreciate in value. But we have to have them. So what should go into the calculations in getting a car?

Things to Consider

1. Sticker Price of the car - the most obvious expense is the upfront cost of the car
2. Maintenance costs - regular oil changes, tune-ups, tire rotations, etc.
3. Gas - its expensive now, and there's no real end in sight. This can really add up.
4. Insurance - the faster, sportier, more luxurious it is, the more you'll pay
5. Other expenses - such as taxes, parking fees, car wash, etc
6. Resale value - the only real return. Most experts would say you lose 20% of the car's value just by driving it off the lot.
   

Once you add up 1-5, and then subtract 6, you'll find your real cost to own the car. But that's assuming you can pay for it all. If you need financing, you'll probably add at least another 5% to the total bill.

How Does Financing Work?
There are a few terms you should know before you get into any kind of financing:

• Loan Term - how long you have to pay back the loan, usually listed as number of months
• Interest rate - your annual rate to borrow is. This rate, divided by 12, is the interest rate you are charged every month.
• Principal - the amount you actually borrowed
• Down payment - how much you need to pay of for the car before the bank is willing to loan you the money

On loans in general, and car loans more specifically, a down payment is necessary to assure the bank that it can make some profit off the loan if you were to default, that is, be unable to pay off the loan.

A complex formula is used to determine your monthly payment. You can find a calculator here. Essentially, every month you are paying a portion of the principal as well as interest. Initially, you will be paying much more interest than principal. As you get closer to the end of the loan, more of your monthly payment will be devoted to principal.

A lot of people would suggest paying off loans as quickly as possible, to avoid the interest payments. However, I come from a school of thought that there is never a single right answer for all circumstances. Sometimes, a little debt is a good thing.

Are you unsure about when you should pay off debt? Feel free to leave a comment for me to address.

Some Realism

One of the best features of being a finance guy is knowing how to run some basic Excel functions and obtain some interesting information from them. For instance, after I set my goal, I ran a "this is real life" test on my goal.

To begin, I have a fairly high base salary for someone of my work experience (zero years, zero months), so I have a slight edge (with the same assumptions, someone making half as much can reach the goal 4 years later). But working with that, I added a few more variables into the mix. I considered that I would save 10% of my base salary, pre-tax, and 50% of my bonus annually. This savings would go into a stock market account with an average return of 10%, which is about the norm.

Next, I considered that bonuses would average about 10% of my base salary. My base salary would be augmented annually at about 3.5%, and every three years, instead of a inflationary increase, I would receive a promotion, adding 12.5% more to my salary.

After all these considerations, my realistic liquid assets would only be $187,317.65, of which $119,289.45 is savings, and the rest market returns after 8 years. So clearly, I would only be 18.73% of the way to my $1 million goal by age 30.

For fun, I allowed some adjustments for different variables to see what would allow me to obtain the $1 million value. Two outrageous methods are either to save 78% of my base salary or hope for average market returns of 49%.

It is going to be a tough road ahead.

Starting Networth

Student Loans
How we dread paying for that! Well, that's the price I pay for the two sheepskins that will be hanging up in my office cubicle.

I currently owe $35,218.78 at an average APR of 5.83%. To pay it off in 10 years, I have to pay $432.17 monthly. There's one big hit to getting to my goal.

Credit Cards
Ever since I got into MBA school, credit card companies have bombarded me with offers. I've taken up some of them, because frankly, getting free money for 12 months is always a good deal, if you know you can pay them back in 12 months.

I currently on average owe about $1700 to them, with about $1100 not accruing interest.

Savings
My bank account these days look a lot better than they used to, thanks in part to a nice summer internship where I worked a lot, and spent very little of the pay checks. That number comes to: $3,011.02.

Investments
As a finance guy, the one thing I always have to believe in the stock market as a good way to invest my money. Currently, my account has $4,778.79.

Overall
Add it all up, and I'm at -$29,128.97 or -2.91% of the way there.

First Post - Introduction, Purpose

Introduction
It will be some time before anyone reads this post. But I wanted to introduce myself to the blogosphere. Okay, maybe I'm not ready to tell people my name and my location, but I'll tell you my A/L.

I'm 22 year-old male, and come March 2007, I will graduate with a MBA in Finance from a top 30 business school. I graduated with a BA in Computer Science and Economics in 2005.

I have been through the torture of job search, and I will begin my first (real) job in April 2007, working for a major bank, as a portfolio analyst.

As I get closer and closer to graduation, I realized that I'm suddenly without purpose. My whole life I have been told, nudged, prodded, goaded, and thrown at one goal: graduate from college with as useful degree.

And now, I am done.

What new goal should I set for myself? I thought about for a long time, and after reading some other personal finance blogs, I realized A) I needed a lofty monetary goal and B) I needed to blog about it so that other people who are just starting their careers have something to relate to.

Lofty Monetary Goal
Hit $1 million in liquid assets by age 30.

Blog Purpose
To share my progress, along with my own insights and experiences about finance and the corporate world.