Friday, March 13, 2009

Financial Advisors

Are not the most useful people around. For one thing many of them attend all the same seminars, read the same books, and get literature from the same investment houses.

I picked up a Kiplinger's (personal finance) magazine recently. It had some silly article on how to cope financially with the downturn. Too Late!!! The time for that article to go to press was in 2006!

Unfortunately most people who save for retirement have listened to the same "advice" regarding 'investing for the long-term', 'don't sell now, you will lock in your losses', and 'if you are young, you can recover from this'.

Perhaps. The inflation-adjusted return on the Dow right now has us back to 1966. So that means if you invested $1000 in the 30 Dow Blue Chip Stocks in 1966, today you would have $1000. And not a penny more. Looks like you need a VERY long term investing outlook.

Perhaps you have to be a little more active with your investments - engage in market timing. Which, by the way, the same "advisors" tell you is bad, very bad. You will lose money, they tell you.

Well, let's take a hard look at reality: How has being a passive investor worked out for you?

Tuesday, March 10, 2009

Goldman's Government

So we are learning now that quite a bit of money that was used to prop up AIG "to prevent a financial system meltdown" instead just went to pay off Goldman Sachs on a bunch of their "casino investments" gone bad.

Nice.

I don't own a pitchfork, but I'm about ready to buy one.

Paradigm Shift

I want to briefly talk about personal finance outlooks, and how that relates to government programs to prop up the housing market.

I don't lease vehicles. My cars are paid for and I will drive them until they are worn out. When they break, I repair them myself if possible. I am also about 9 yrs away from being mortgage-free. I consider debt of any kind to be a huge threat to my personal freedom and happiness.

I also am an investor. Among my investments is 10,000 shares of stock in Rite Aid. "WOW" you think. "That guy must be really rich to afford 10,000 shares". Not so. I purchased the shares at $0.32 per share at a cost of $3200. Rite Aid stock is currently trading at $0.21 per share, so I am down about $1100 on this investment. No big deal. The entire investment in Rite Aid is speculative, so the original investment was mentally a write-off at the outset. This tiny portion of my investments I will call my "casino investment"

Two things to note about my "casino investment":
  1. I am using my own funds, rather than borrowed money
  2. The "casino" portion of my investment is a tiny, tiny fraction of my overall investment strategy
Here's where the paradigm shift came to me:

Suppose my Rite Aid stock purchase was instead a $500,000 house. Suppose further that I borrowed every bit of money (100% financing) to purchase my Rite Aid stock. Also suppose that the lender is willing to have my Rite Aid stock as full collateral on the loan I used to purchase the stock. And lastly of all, suppose that I am completely flippant and dismissive of debt, other than as it relates to my month-to-month carrying costs. My HOME is essentially a "casino investment".

I am willing to bet that there is a reasonably large group of Americans who view their homes as little more than a tax shelter, semi-permanent residence, and/or casino investment. I know of young-ish (and arrogant) realtors who "owned" as many as 6 houses simultaneously.

Meanwhile, back in the real world, a large number of hard-working Americans (who don't make a living skimming money from real-estate transactions) are losing their jobs in this downturn.

With these things in mind, how likely is it that the government's attempts to keep homeowners paying their mortgages (and thus keeping Bank of America in business) will succeed?