While children are typically thrilled with their panning results, an actual prospector might be less excited. At the time of this writing, the price per gram of gold is more than 5000 times that of iron pyrite. And the truth is that the fundamental value of iron pyrite is even lower–it only maintains the price it has because of its novelty value.

While the two minerals may appear alike to the untrained eye, there is no doubt that their resemblance is only superficial. So it is with many securities. Often, individuals are drawn to a particular stock because it is discussed by a television fiancial analyst or the company behind it is is in the news or its CEO is often seen around town with well-heeled investors. It is easy to confuse a company’s visibility or popularity or even revenues with its future prospects. But as an investor, it is critical to be able to separate what simply glitters from true gold.

I won’t lie: this is not a simple thing to do. Sports teams have struggled with this forever as they try to get the biggest bang for their buck. Michael Lewis’s bestselling 2004 novel “Moneyball” chronicles the efforts of the Oakland Athletics to find hidden values among highly-paid athletes. It would seem that after the publication of that book, all the secrets would be out, and the market would then be able to accurately reflect the value of each player, right? Not so. Current research indicates that in many sports, there is “an extremely weak correlation between spending and winning“. In the NFL, for example, “increasing team payroll by 10 percent yields just a quarter of a win.” Given the fact that the average NFL team payroll exceeds $100 million per year, paying an extra $10 million for a quarter of a win (an abstract concept, to be sure) is a huge bet to take. What that $10 million guarantees is some flashiness or press coverage, but it certainly doesn’t promise improved performance.

And it’s not simple with securities, either. To be sure, there are no guaranteed, fool-proof ways to pick winners. But sticking with fundamentals is a pretty good way to improve your odds.

Any regular GoalMine blog reader knows that we are fans of value investing. At its core, value investing suggests that there are some stocks that are undervalued for one reason or another, in some cases by a wide margin. These are often stocks that are not popular or attractive–they typically do not “glitter”, so to speak. But their worth is there to be seen by any who look closely, revealed in their financial statements and demonstrated in the “wide moats” that Warren Buffett is fond of referencing. Look for investments that have real staying power, investments that have tangible value and unique, durable, measureable advantages over their competitors. These are the types of investments that are worth their weight in gold. Although such investments may not be shining at the moment, in the longer term, markets are efficient and will find the right price for these hidden treasures.

For every flash-in-the-pan investment out there, there is a less sexy but surer investment available. As you look for your next fortune-making idea, don’t be lured in by fool’s gold–demand the real thing.

Images: gold pan via Nate Cull; baseball via Rhys Asplundh; gold foil via photozou.jp

Over time as a company does well and earns higher profits, it can increase its dividend to its shareholders. Conversely, companies that encounter trouble can lower their dividend. Unlike interest from an FDIC bank account dividends are not guaranteed: companies may stop or start paying dividends at any time.

Some companies choose not to pay a dividend to their customers, opting instead to use all of their profits to further their business opportunities or invest in new projects.

To understand what exactly this means, let’s first explain what an index is. An index is a simply a listing of a group of securities that meet certain characteristics. Many indices are composed of the stocks of companies that are, in aggregate, meant to represent the overall economy. Both the S&P 500 and the Dow Jones Industrial Average are indices like this. You can’t invest directly in an index, though; it is simply a measurement, not a security in and of itself.

Index funds, then, are meant to allow people to invest in a way that closely mirrors the performance of the index. They focus on holding a diverse set of underlying investments that are passively managed. That means that there is no stock manager that is constantly buying and selling the underlying investments. The index is set once, and modified on a very periodic basis. For many investors, this is a low-cost way to invest in a diverse set of companies.

You can buy a product, or a piece of the company that makes it. Because that’s what a share of stock is: a real-life, honest-to-goodness ownership stake in a company. You’re not just buying a piece of paper; you’re buying a business.

Buying things that reproduce (stocks) rather than things that disappear (the product itself) is a case that Warren Buffett has made many times. It’s simple idea, but one that’s worth revisiting every so often.

Of course, buying individual stocks isn’t for everyone, and we always recommend diversifying investments, either by using mutual funds or otherwise. But it’s a good reminder to spend our money on things that provide a return far into the future.

Are there any things on which you regularly spend money that would be better spent on buying investments?

Image via Omer Wazir

Warren Buffett recently published an adapted excerpt of his annual shareholder letter that has people talking. In it, he makes the case that stocks almost always beat other investment alternatives over time. He divides investment opportunities into three categories:

1. Currency-based investments: These are things like money-market funds, bonds, mortgages, bank deposits. While these are generally seen as “safe” investments that carry little risk, they also tend to deliver returns that are less than the rate of inflation. Buffett says these investments can actually be considered risky because they’re almost guaranteed to lose value in the long run when you take inflation into account.

2. Gold: The second investment category comprises things that don’t produce anything, but that are hoped to have greater value in the future. A prime example is gold. Buffett criticizes this kind of investment because he says it doesn’t “do” anything. At the end of the day, it’s just worth whatever someone is willing to pay for it, which is often driven by fear.

3. Stocks: Of course, the third category is the investment that Buffett prefers. He calls it “investment in productive assets” – that is, investments in things (companies) that actually produce other things. Historically, this kind of investment has beaten inflation better than the other two categories.

Of course, even Warren Buffet doesn’t have the final say when it comes to investing, and quite a few people have disagreed with him. Still, it’s worth reading his whole article. What do you think of his assessment?

 
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Anybody who has established strong habits–good or bad–knows the tremendous power they carry with them. Many people are zealous about their daily walk or run. Other people like to check their email first thing in the morning, or read a book every evening when they get home. If you have a strong habit, think about how much effort you have to exert to slip into that habit: chances are, the answer is “almost none.” That’s because the decision making is already done. You don’t have to make up your mind anymore. You just execute automatically.

But the sad fact is that many of us just don’t get around to forming the same kinds of financial habits. We rely on our best intentions and a hundred day-to-day decisions to come together for our financial good.

In a recent newsletter, Carl Richards of BehaviorGap.com (who we’ve featured before) talks about the risk of relying on willpower and discipline alone to help us reach our financial goals. He says, “Willpower, like a muscle, can get tired if you overuse it”, and goes on to say, “So on the ‘easy’ decisions, like saving regularly for your kid’s education or your retirement, embrace the option to automate. Save your willpower for the really tough decisions, because they will come.”

This is sage advice. Sure, there are plenty of times when you need to make a change to your financial plans to accommodate an unusual situation or a change in priorities. But for long-term investing and saving, the best course of action is to “set it and forget it”. That way, you only have to use your willpower once, but you reap the benefits for many years to come. It’s a bit like planting perennial flowers–you only incur the effort of planting one time, but enjoy the plants every year.

At GoalMine.com and some other financial sites, you can set up a financial plan that will automate the process of transferring money from your bank account into your other financial products. We encourage you to set up a financial plan and then automate as much of it as makes sense for you. That quick burst of willpower can be worth its weight in gold (or any other financial instrument).

 
Images: Runner via Giulio Menna, sage plant via linzeeanne

While these types of products can sometimes be guaranteed by banks backed by the FDIC, or by insurance companies, you can also buy fixed income products that might be at risk of loss. Those that have the risk of loss often pay higher amounts to compensate you for the added risk. Fixed income products are often used by people that want predictable income, like retirees.

If you’d like to learn about how bonds and other fixed income securities differ from stocks, check out this Investing U article.

1. “I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.”

- Warren Buffett
 

2. “It’s not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for.”

- Robert Kiyosaki
 

3. “You have to learn that there’s a company behind every stock and there’s only one real reason why stocks go up. Companies go from doing poorly to doing well or small companies grow to large companies.”

– Peter Lynch
 

4. “Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.”

-Paul Samuelson
 

5. “The four most dangerous words in investing are: ‘this time it’s different.’”

- Sir John Templeton
 

And one bonus quote just for the fun of it:
 

“If I’d only followed CNBC’s advice, I’d have a million dollars today. Provided I’d started with a hundred million dollars.”

- Jon Stewart

 
Images via tornatore, Robin Stott

“But shouldn’t the markets already take all available information into account?”, you ask, “Shouldn’t they prevent any investment from trading at an incorrect price for any reasonable length of time?” Believe me, I’ve asked that same question. The problem is that pricing an asset is effectively an exercise in predicting the future–and nobody is all that good at predicting the future.

If the future of a company could be predicted with certainty, then pricing that company’s stock would be a breeze. But it can’t be known with certainty, which means that a lot of subjectivity is brought to bear in determining how much a stock is worth. And with subjectivity come errors and misperceptions.

One common error that we see among investors is the problem of anchoring. An anchor is a reference point that people assume to be a reasonable jumping-off point for determining the value of something. For example, if I were to ask you how much a can of soda pop ought to sell for, most of you would give an answer somewhere between $0.50 and $1.00. Why? Because you are using the anchor of soda pop machines, which typically feature can prices in that range. But is that really a good estimate of how much it should cost? Is it even a useful jumping-off point? That’s a harder question.

When it comes to stock prices, people suffer from the same problem. Many people assume that yesterday’s stock price is a good anchor: after all, one assumes, it should take into account all available information about the company. But what if it is a bad anchor, reflecting not just facts but also bias? If so, it may actually serve to blind people to the true value of a company.

A recent study indicated that “large speculative bubbles can only occur when fundamental traders highly anchor to stock market prices”. In other words, too much anchoring on stock market prices can not only lead individual investors astray, it can lead to large bubbles.

That’s where value investing comes in. We believe that the best investments are often those that are overlooked by others for one reason or another. In many cases, investors are choosing the wrong anchors, including yesterday’s stock prices. In his 2004 letter to Berkshire Hathaway investors, Warren Buffett has famously said, “Investors should remember that excitement…[is] their [enemy]. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful.” In other words, don’t let the exuberance or fear of others lead you to value a stock improperly!

Value investing recognizes that nobody–including us–can predict the future, so it suggests looking for opportunities where there is a wide margin for error in the prediction. These are often found in businesses with strong returns on invested capital and durable competitive advantages.

Value investing, as we see it, offers the kind of anchors that keep a ship harbored safely rather than sinking the careless sailor.

 
Images via L S Wilson, carlo cravero

Deposits at many banks are FDIC insured. This means that, up to the legal limit (currently $250,000 per depositor per institution), your money is rock solid safe. If a bank should fail, the FDIC, backed by the US government, will ensure that you get your deposits. Mutual Funds and other securities, however, are not bank deposits and are therefore not insured by the FDIC.

Researchers seemed surprised these numbers were so high, but it makes a lot of sense to me. After all, people rely on their cell phones and the Internet for all sorts of things (in my case, perhaps to an unhealthy degree!), so of course they’re willing to keep spending money on them. And frankly, I don’t think that’s a bad thing.

Because often, when people resolve to save money, they try to reduce spending on EVERYTHING. Of course, this is really hard, and most people end up failing and going back to their usual spending habits. It just takes too much willpower.

A better and more sustainable approach to saving is to consciously spend money on the things you value – and not on the things you don’t value.

It seems obvious, but it’s not always something we’re aware of. For example, I have a friend who really loves her daily premium latte. Last New Year’s, she resolved to spend less. She felt guilty about the coffee habit (after all, “don’t buy coffee” has become a personal finance cliché), so she stopped buying it…and promptly burned out within about a week. She felt like a failure.

Eventually, though, she realized she didn’t have to stop buying coffee to cut her overall expenses. She could keep spending some money on the things she really loved, and aggressively cut spending on the things she didn’t care about as much (which, in her case, turned out to be cable and some eating out). These days, she’s settled into a pretty frugal routine…which still includes lattes.

So by all means, resolve to save more money this year. But don’t feel like you need to cut everything out of your life. Spend money on the things you value, and cut costs on the things you don’t. You won’t feel so deprived, and you’ll be more likely to stick with it all year long. Good luck!

Image via Mr T in DC

1. Visualize Your Gray Hairs Now

A recent study in the Journal of Marketing Research bears the academic title, “Increasing Saving Behavior through Age-Progressed Renderings of the Future Self”. It basically suggests that if you picture yourself at retirement age, you will better be able to identify with your future self and, as a result, you will be more likely to make sacrifices today for the octogenarian you will become.

Need a little help imagining what you will look like? Check out the Face Transformer at the University of St. Andrews website which will let you upload a photo of youself and transform it into an old person. Then keep the photo next to your desk to remember to put a little money aside for those golden years.
 

2. Tie Saving & Investing to Your Other Resolutions

There’s a lot of talk about how to better use incentives to get ourselves to do things we don’t really want to do but that are good for us. Gympact is a new website that asks you to make specific workout commitments. If you stick to your workout as promised you will get paid, but if you don’t, it will cost you money. It’s a pretty draconian setup, but the spirit of it is right on.

One way to tie your saving and investing to your New Year’s resolutions is to pay yourself every time you don’t stick to one of your other resolutions. Missed your workout today? Doh. That’s $10 to your savings or investment account. Couldn’t resist that cheesecake at dinner? That’s definitely a $20 offense. And we like the idea of paying yourself much more than paying others.
 

3. Get Others to Help

Letting others in on your New Year’s resolutions makes those goals feel real. You can use a website like Stikk.com to announce to your friends and family just about any goal or resolution you’ve made. Of course, for your financial resolutions, you can also use GoalMine to set them up and share them.

 

Weights image via keertmoed
People image via Adam Jones, PhD

If you’re not sure what to do with them, why not deposit the cash into your GoalMine account? Until the end of January, we’re letting you trade in your gift cards for cash. In fact, if you’re a new customer, we’ll even pay you 150% of the face value of your first card. Read more about it, or check it out directly!

1. Pick and stick

We’re big believers in the power of compounding returns. But to reap them, you have to get in the game and stay in the game. This is especially true if you, like us, buy into the idea of “value investing”–that is, picking businesses that are trading below their long-term value. To do well with value investing, it’s important to be patient. If you pick a good investment, and stick with it, you’ll be in good shape over the long term. Getting in and out all the time is a very risky proposition, and generally a bad idea for most investors.

As a grade-schooler, I learned a little song that said, “Make new friends, but keep the old: one is silver and the other gold.” I’m not suggesting you buy precious metals (or that you don’t–that’s up to you), but it is worth remembering that there is no reason to jump ship on an investment just because you’ve been holding it for a while.

2. Do it, then do it again, then again and again

Consistency is one of the traits of successful investors. In fact, creating and adhering to an investment plan is one of the best ways to make money over time. Putting money into your investments on a regular schedule–on the same day every month, for example–helps produce the financial discipline necessary to build a substantial portfolio. Furthermore, it allows you to take advantage of dollar cost averaging.

3. Keep learning

There is always more to learn about investing. Not all of the information out there is helpful, or even accurate, but there are many good resources available. We’ve recommended some strong investing blogs before, and have also provided a list of some excellent investing inforgraphics that can provide perspective on market performance and other elements of investing. And, of course, we’d love you to go through the basics of investing with our own Investing U articles.

We hope that the coming year brings you much happiness and success, in investing as in the rest of your life.

Image via mrhayata

Usually, when you buy shares of a company, you are buying them from other people, not directly from the company. However, in the case of an IPO, the company is the seller of the shares.

IPOs tend to generate a lot of attention from the financial press and other media. This is because many IPOs mark a sort of rite of passage for exciting, growing companies. It is a way for companies to grow more quickly, and it gives individual investors the chance to take advantage of companies that are doing new and different things.

In general, shares in an IPO are priced to meet two objectives: generate money for the company, and allow those who buy the shares at the IPO price to make some money on the first day of trading. If the IPO price is too low and prices rise substantially on the first day of trading, it means that the company left money on the table. But if the IPO price is too high and shares fall or remain stagnant on the first day of trading, many people will flee from the stock, which could hurt the company’s ability to raise money later.

Finally, it’s worth noting that most companies that have an IPO also sell stock again later–it’s rarely a one-and-done kind of thing.

1. Make it concrete

An oft-repeated truism is that “unwritten goals are just wishes.” We concur—a real goal has a name, an objective, a deadline, and a plan associated with it. It’s not enough to say, “Someday, I want to visit South Africa”. If that is something you really want, be specific about how and when you’ll get there. How much money will it take to accomplish that goal? How much can you set aside each month? When do you want to complete the goal?

Being specific about your goal—both what it is and how you’ll reach it—is critical. It’s the difference between saying, “Maybe I’ll get in shape” and “I will run for at least 45 minutes every Monday, Wednesday, Friday, and Saturday. I talked to my friend John, who also likes to run, and we will meet at the park at 6:30 on those days to run together.”

Financial goals need the same level of specificity. A concrete plan is the foundation of a successful goal.
 

2. Choose something that speaks to you

It’s hard to stick with a goal if it’s not something that really matters to you. For example, many people quit smoking or start saving money concurrent with the birth of a child: that new baby provides a different and more meaningful incentive.

This is true for any financial goal. Before setting up a new goal, think about your motivations, and let those guide your new goals. It’s a lot easier to set aside that $100 every month when it’s “Enable my daughter to go to college” or “Finally see the Eiffel Tower in person” than just another transaction in the ledger. Setting meaningful goals, with specific people or events at the heart of them, will help you to stick to your plan.
 

3. Keep it simple and realistic

Another element of sticking to a plan is to have a simple and realistic plan. It’s great to think, “I’ll set aside half my income every month to save for a luxurious retirement”, but that’s not realistic for most of us.

Now that you have a concrete goal that is meaningful to you, setting up a simple plan to stick to it should be easy. Take a look at when you want to achieve your goal, and how much you’ll need to set aside each month to get there. You now have your simple plan.

Make a committment to do it every month, without skipping a month or taking money out. Simple. Realistic. Achieveable. You can do this.
 

4. Make it automatic

Another step up from “simple” is “automatic.” Imagine that you had a robot who prepared all your food (and imagine that it’s a great cook). If you decided to start eating more fish and vegetables, you could simply program the robot to prepare those foods. It would not deviate from your directions, and you’d automatically meet your goal. You’d have to actively opt out of the desired
behavior, making it very easy to stay on track.

The same is true of financial goals. When you set up automatic monthly or weekly contributions to your goal, you are saying, “Keep me on track unless I tell you otherwise”. The power of an automatic contribution is tremendous: it gives you consistency, measureability, predictability, and a defined path to success.
 

5. Involve others

A few years ago, I made a resolution to drink less soda pop. I told all my family and friends that I was going to do it. A few of them expressed their doubts, but most offered their support. For the next few months, whenever I’d see those family and friends, they’d ask me how it was going. This motivated me to stick with the plan—which, I’m happy to say, I did.

Studies have shown that those who are looking to lose weight are much more successful when they have a weight-loss “buddy”—someone to help keep them motivated and on track. Financial goals can be much the same.

By sharing your goals with others, you can leverage their help in staying on track. And in some cases, other people may want to encourage you financially as well. Saving for little Sarah’s college education? Invite her grandparents to help. Raising money for a charity event? Invite your friends to donate to the cause in lieu of a birthday present. Your network can help keep you on track, or even give you a boost on the way.

Of course, the first step to keeping a goal is making one. There’s no better time than now–your success awaits!
 

Pen and paper image via Ann Larie Valentine
Eiffel Tower image via Jiuguang Wang
Canoe image via Shezamm

You may have already heard of dollar cost averaging. As usual, the investing experts have managed to come up with a spectacularly long and confusing name for a really simple concept. Dollar-cost averaging means that instead of investing all your money at one time you put it in a little bit at a time. So, for example, instead of waiting to put together $1,200 and then investing it all at once, you would put in $100 a month for 12 months.

Why should you care about DCA? Because the way you put your money in will affect how big or small your returns are. If you had perfect foresight and could time the market with 100% accuracy, it would be simple to choose when to invest your money. Sadly, nobody has that kind of prescience, and in fact, almost nobody is very good at timing the market at all. Therefore, using DCA allows you to purchase some shares at lower prices when the market is down, and some shares at higher prices when the market is up. This ensures that you don’t get burned by putting too much in when the market is high, only to see the prices drop later and leave you with a loss.

At GoalMine we generally like DCA as an investing method for two reasons: first, losing money is often a lot more distasteful and harmful to people then is the risk of not making as much. So we would rather reduce risk somewhat–even if it means reducing reward a little as well. Second, DCA really creates the kind of investing behavior that we think is the real key to success: it helps you create an investment plan and stick to it no matter what the markets are doing. As we always say, people aren’t good at trying to time the market. If DCA helps you focus on creating a disciplined investing approach rather than on the roller-coaster rides of the market, then we’re in.

Image via iChaz

Beginning December 19 through the end of January 2012, you’ll be able to do just that with gift cards from more than 400 retailers. If you’re opening a new account, we’ll even give you 150% of the value of your first card! You can read more about it here.

The program won’t be ready until December 19, but if you’d like to get a reminder when it’s ready, you can enter your email here (don’t worry, we won’t spam you). We’ll post here again when it’s ready!

A bubble forms when people start paying too much for things. We’ve seen examples of this in stocks and houses, but it could occur in any asset. It typically happens when people become excited about a particular asset or asset class. As demand for the asset rises, so do prices. People keep buying and prices keep going up until people realize that they have paid too much. At this point, the bubble “pops”, and prices begin to drop. This is especially painful for people who purchased the asset at its most expensive, as they can no longer sell their asset for anything close to what they paid for it.

Fortunately, there are a few economic trends that occur during bubbles that can help us spot them and avoid being caught in the ugly and inevitable correction. A lot of it has to do with the way people are accessing and utilizing borrowed money. An increase in leverage, or using borrowed money to buy something, is at the heart of most bubbles. When people are investing borrowed money in an asset, and the price of that asset decreases, they are stuck with something that is worth less than the amount they owe on it. This is the root of the cause of the current housing collapse along with the other core element of most bubbles: expansion of credit, and particularly the extension of credit to those who are not creditworthy.

Stepping back, when a certain topic is all the chatter at cocktail parties, and there is frenzied activity around it, it is almost certainly a sign that you are at the top or near top of a bubble. To me, when large mansions were selling to families that didn’t have the means to pay for them, that was a clear sign. When it took 2-3 hours to get a million dollar mortgage, that was also a telltale sign. During the top of the tech bubble, anything tech went up and went up fast, including companies with no revenues (and no hopes of ever getting any). People made paper profits too easily. When something seems too good to be true, it usually is. Bubbles take years to form, and then tend to burst relatively quickly. Today I think we’re in a bit of a tech social bubble. Companies like Groupon, LinkedIn and Facebook have astronomic valuations. There will be a few survivors but most of these companies will be worth far less than they are today. Stay safe and don’t believe the hype!

Image via brewbooks

What It Means

This is really a two-part question: what does it mean for travelers, and what does it mean for investors?

First things first: it looks like travelers won’t be hurt too much, at least in the short term. In an email to customers, the company wrote, “American is honoring all tickets and reservations as usual, and making normal refunds and exchanges…” and “The AAdvantage miles that you’ve earned are yours and will stay yours…until you choose to redeem them.” All expectations are that things should remain as they were for customers, at least in the near future.

But what does this mean for investors? Here, the news is less heartening: the consensus is that "shareholders almost certainly will be wiped out". This is typical in both Chapter 11 and Chapter 7 bankruptcies.
 

What Can I Learn from This?

There are a number of takeaways for investors, both those who held stock in American Airlines and those who did not:

1. Sometimes stocks are cheap because things are going south
We’re big fans of searching for undervalued stocks and stocks that have taken an unfair beating—this is at the very heart of value investing. But that’s not the same as investing in any stock that has seen a large decrease in its share price. In fact, most of the time, stocks that are performing poorly are doing so because the associated company is also performing poorly. Just because something is inexpensive doesn’t mean it’s a good deal. Imagine an unscrupulous grocer who wants to get the most out of his inventory—he wraps decaying meat or vegetables in heavy paper and sells them at a quarter of their original prices. What a bargain, right? No matter what the price, that is a rotten deal.

2. It’s risky to put all your eggs in one basket
Hopefully, none of you had your entire retirement savings invested in American Airlines stock. Heck, we hope none of you have entire retirement savings investment in any single stock. While the stock market goes up and down over time—sometimes dramatically, even in a single day—individual stocks are far more volatile. A diversified portfolio, through mutual funds or other means, can dramatically reduce your risk of getting wiped out by a single bad investment.

3. Get to know the neighborhood
As mentioned earlier, both United Airlines and Delta Airlines previously entered Chapter 11 bankruptcy in order to restructure their finances. In both cases, the companies exited bankruptcy protection and are more financially sound than before. It should be no surprise that American Airlines eventually followed suit. The savvy investor understands not just an individual company, but its competitors as well. Knowing the industry’s history—what has worked before and what has not—can help you make good decisions about your investments.

Photo via Luis Argerich

1. Not everything is on sale: Lots of stores advertise crazy deals (here are a few), but you shouldn’t be fooled into thinking that everything in the store is on sale. Grab your deals, but don’t feel like you need to buy other items just because it’s Black Friday.

2. Sometimes the advertised deal isn’t the “real” thing: Some products that are advertised as huge sales on Black Friday are actually “derivative products”; that is, items made by the same manufacturer that look like the standard model but that are of poorer quality. This is especially true of electronics. To see if you’re getting a derivative or the real thing, check out the model number – it will be slightly different.

3. Check online first: Before you hit the stores, see if retailers are offering the same deals on their websites – many do. Not only can you get the same deals, but you may actually end of spending less online since you’ll be less likely to make impulses purchases of other things you see in the stores.

With a little prep, you can take advantage of some great sales, but still stay on track to reach your savings goals. Happy shopping!

Image via scillystuff

Savings accounts are an important part of the financial picture. They are very accessible and completely safe. So when you have short-term needs for a place to put your money, a savings account can be great. Example of appropriate uses of a savings account might include rent money, the Christmas fund, or even a small rainy day fund. However, bank interest rates are currently near zero, meaning that the money in your savings account is sitting still and earning you almost nothing.

One way that banks make money for their shareholders is by using the money you put in your savings account to buy investments. They bear the risk when they do so–your money is guaranteed by the FDIC. But they also benefit substantially when those investments do well. If they invest wisely, they can make healthy profits while paying you only a small amount of interest on your savings.

Unlike savings accounts, investing in stocks, bonds, or other financial products allows for potential losses, and often big fluctuations in value in the short-term. When you invest on your own or through a service, you take on risk–there is no FDIC to save you if your investments go south. Given the ups and down that we see every day in the stock market, investing really isn’t appropriate for short-term needs.

However, when you have a long-time to financially prepare for something like a child’s education or retirement, investing has proven to be more lucrative than simply leaving your money in a savings account. History has shown that a diversified portfolio will usually outperform having money in a savings account over the long term. This is because the American economy makes great changes over periods of 20 or more years. These great changes and advances can lead to large increases in the value of smart investments.

The key lesson here is that there is a place for savings accounts, and a place for investments, in every person’s finances. Using them both–and using them both appropriately–will contribute to a healthy financial life.

Image via o5com

“Equity” is another way of saying “ownership“. When you talk about the equity you have in your home, for example, it’s a way of talking about what portion of the home you’ve paid for.

When it’s used in a business sense, equity, or having equity in a company, is another way of saying “common stock“. Basically, equities represent ownership in a company. That means that you, as a partial owner, bear some risk of when the enterprise does poorly and also reap some rewards when it does well.

The risk and reward are reflected by movements in the share price. This means that you do not receive a direct economic benefit (or penalty) from an equity’s price change unless you sell it. This is the same as with your house: when you already own your house, the market price of the house continues to fluctuate. However, this doesn’t affect you very much until you choose to sell your house or buy a new one.

Others are taking notice of this. Fox Business wrote today that “If starting to invest was more like opening an eBay account rather than trying to file complicated tax returns in Swahili, more people would probably do it.” We couldn’t agree more! Check out the full article over at Fox Business.

#1: You gotta be rich

Have you seen one of the first blog posts we ever did? It just isn’t true that you need a lot of money to invest.You really don’t need to plunk down $5,000 at one time. $50 or $100 a month is all that’s required to take advantage of the power of compounding. As Mr. Earl in the video knew, slow and steady really can win the race.
 

#2: The experts know best

Nope. Don’t think you can just sit back and let others worry about it. Often times fancy brokers can make commissions by selling you certain products, so they don’t necessarily have your best interest in mind when they are helping you choose. It’s really your responsibility to understand where your money is going and why. It doesn’t have to be complicated, but it does have to make sense to you.
 

#3: The most important thing in investing is the performance of what you invest in

This is probably the biggest myth of all. The investment industry spends countless hours and even more money talking about what you should be investing in and how well those investments have performed. Unfortunately, the reality is that even when the stock market or a particular investment does really well the actual investors who put money into it didn’t do nearly as well. Why? Because their own investing behavior got in the way. Most investors get greedy when markets are hot and fearful when they are going down. So they do just the opposite of what they should do: they buy high and sell low.
 

#4: Next week is going to be a great (or terrible) time to invest

Trying to time the market by finding the right time to invest is impossible. Don’t wait for a down day. Don’t wait for next week. Don’t wait for Uncle Maury to leave you a big inheritance. Start today, and start small.
 

#5: Gold is a safe investment

As financial advisers will often tell you, gold (and other commodities) definitely have their place in an investment portfolio because they provide a way for you to invest in things other than stocks and bonds, which have a tendency to move up and down in price together. But that doesn’t mean gold is necessarily a ‘safe’ investment. The price of gold goes up and down just like everything else. If you’re betting on the end of the US dollar then gold might seem like the safest investment to you–but that would really be a wager, not an investment.

 
Image via Orin Zebest

Your heart catches in your throat as you see the source of the noises: a moaning, dead-eyed zombie slowly limping toward you. You instantly know that this is the beginning of the war, just as your neighbor once predicted. And you instantly know that if there is one person who can help you, it is Warren Buffett.

Yes, you read that correctly: Warren Buffett is going to save you from the zombie apocalypse. I can’t speak for his skill with a shotgun or a baseball bat (although he does mention that he tries to “exert a Ted Williams kind of discipline…waiting for the fat pitch” [1]). However, I can say that Buffett’s investing approach provides some great insights for escaping any zombies you might encounter.

1. He is always looking for a wide moat

The best way to survive the zombie apocalypse is to keep them away from you. A wide moat prevents zombies from entering your castle–and it prevents competitors from eating up your customer base.

Buffett explains that “A truly great business must have an enduring ‘moat’ that protects excellent returns on invested capital” [2]. This “moat” that Buffett seeks is a durable competitive advantage, something that keeps the company ahead of the competition year after year.

When Buffett was fresh out of college and had just started the investment firm of Buffett-Falk & Company in 1951, the first stock he pushed to customers was the insurer GEICO. Because of its unique structure—utilizing no branch offices and selling to individuals with fewer than average claims [3]—it offered a wide moat. And it continues to do just that. More than 50 years after that first sale, Buffett said, “GEICO possesses the widest moat of any of our insurers, one carefully protected and expanded” [4].

2. He’s in it for the long run

Zombies are tireless—since they are undead, they don’t take any breaks in their quest for your brains. Even if you’re a great sprinter, zombies will catch up to you when you stop moving.

Buffett understands that a short-term approach is doomed to failure. Speaking of his Berkshire-Hathaway’s investments, he says, “our favorite holding period is forever”, and that he strives to invest only in “those handful of businesses about which we have strong long-term convictions” [5].

And Buffett lives the same way he invests. He still resides in the same home he purchased in 1958. He calls that purchase “the third best investment I ever made,” coming only after “wedding rings” [6].

3. He understands how to choose good partners

Nobody can survive the zombie apocalypse alone–and even if you could, would you want to? It takes good communication and great partners to get through the long nights of guarding against the living dead.

Warren Buffett has been famously committed to his people. He and partner Charlie Munger have been working together for more than 50 years. Munger is the “co-thinker at Berkshire, which is no small thing” [7], and is mentioned some 30 times in the most recent Berkshire Hathaway annual letter [8].

Of the CEOs of the various companies in which Berkshire Hathaway invests, Buffett says, “Our team resembles a baseball squad composed of all-stars having vastly different batting styles. Changes in our line-up are seldom required” [9]. Having a good team on which one can rely can make all the difference.

4. He plans ahead

If you wake up one morning and discover that the dead have left their graves and have entered your neighborhood, the time for making preparations is long past. Hopefully, you planned ahead and have food, water, and weapons stored, and have made fortifications to your house to prevent zombies from entering.

When Buffett makes an investment, he knows that things can turn out in several different ways. He also knows that he cannot predict the future with any certainty—in fact, he says, “At Berkshire, we make no attempt to pick the few winners that will emerge from an ocean of unproven enterprises. We’re not smart enough to do that, and we know it” [10].

But not knowing the future is different than not planning for the future. In September 2008, as the financial world was falling apart, Warren Buffett invested $5 billion in Goldman Sachs, “marking one of the biggest expressions of confidence in the financial system since the credit crisis intensified” [11]. The investment included preferred shares paying a 10% dividend, as well as warrants to buy another $5 in Goldman shares. The deal gave Buffett several ways to make money, depending on how the company and the larger economy fared. Ultimately, it resulted in Berkshire Hathaway gaining some $3.7 billion on its original investment [12].

5. He doesn’t panic

In times of great uncertainty, there’s nothing like a cool head. (Not a cold, clammy, pall-of-the-undead head, of course, just a calm demeanor and clarity of thought.) When things turn south, many people make rash decisions, which lead them right into the zombies’ brain-hungry hands. In moments of apparent crisis, however, Buffett has stayed focused and calm.

In fact, Buffett is a master of staying calm and thereby making great investments. He says, “be fearful when others are greedy and greedy only when others are fearful” [13]—in other words, when everyone else is running, staying cool can yield big rewards.

One of Buffett’s most famous investments was in American Express after it had been rocked by the “salad oil scandal” [14]. While nervous investors exited the stock and its value was cut by half, Buffett saw things clearly—it was merely a short-term “drawback for an otherwise very stable company with long-term growth potential”. In fact, “as of December 31, 2009, the company’s 151.6 billion shares [were] worth more than $5 billion, an unrealized gain of $3.7 billion and an increase of 290%” [15]. Patience is a virtue—and in some cases, a very profitable virtue.

 
Go forth and defeat zombies
Perhaps the best part of all of this is that Buffett’s wisdom is applicable in times of prosperity and in times of panic. We hope you find these insights helpful as you seek to keep your portfolio, and your neighborhood, zombie-free.

 

References
[1] Berkshire Hathaway 1997 Chairman’s Letter

Images
Moat via celesteh.com
Zombie group via theogeo
Zombie individual via danhollisterduck

How could that be? Well, when you buy stock in a company, you’re buy a piece of that company and the company’s future profits. In a bear (bad) stock market, the value of those shares usually declines because investors expect that those companies won’t do as well in the near future. So if you’re planning to sell your investments soon, the bear market probably isn’t great news for you.

But a bear market doesn’t fundamentally change the long-term outlook for corporate profits. So what does that mean for longer-term investors?

The bear market means that something you buy every month — stocks — just got a lot cheaper. And every dollar you sock away in your retirement fund today gets you a bigger share of all those future profits.

This is a great way to look at it, and is yet another reminder why so many people recommend investing for the long term.

So next time the stock market has you down, just remember: something you buy every month just got cheaper!

Image via BlackburnPhoto

 

#4: Millionaires don’t keep money in a checking account
This isn’t true exactly, of course, but the idea–that it’s a bad idea to keep ALL your money in a checking account–is on the money. The key is to articulate your financial goals, and then put your money to work in the appropriate way for each goal. As we’ve discussed, a long-term goal (e.g. saving for a child’s education) deserves a long-term financial strategy, such as investment in mutual funds. Meanwhile, short-term financial needs (e.g. paying this month’s rent) require short-term tools, like a checking account. If you sit down and identify your financial goals, and then invest appropriately, you’ll be ahead of the game.

 

#5: Millionaires don’t desire instant gratification
If you’ve read practically anything on this blog, you’ll know that we preach patience at every opportunity. This is critical to investing success–as we’ve mentioned before, those who get in and stay in stand to reap much greater rewards than those who flit in and out of investments. Setting long-term goals and taking long-term investment strategies is the surest path to strong returns.

 

#6: Millionaires don’t “impulse buy”
To this, I would add that great investors also don’t “impulse sell”. Our feelings and desires are strongly affected by our perceptions of what others are doing. Often, impulse purchases are the result of perceiving that others are buying something, so we should too. The best investors realize that if everyone is buying something, it is likely overvalued–and, likewise, that if everyone is selling something, it may well be undervalued. Impulse buying or selling often results in sub-optimal returns. Carl Richards offers a wise perspective on this topic here (and illustrates with the tongue-in-cheek graphic to the right), and our own Rimmy Malhotra advises that “over-tending your portfolio” is a terrifying financial move.

Unless you happen to win the lottery, becoming a millionaire isn’t something that happens overnight. But by investing properly for your financial goals, sticking to an investment plan, and avoiding the impulse to jump in and out, you can put yourself on a path that leads to a bright financial future.

Tree image via USFS Region 5
Graph via behaviorgap.com
 

GoalMine’s CEO, Rimmy Malhotra, recently contributed to a CBS Moneywatch article entitled “Forget Halloween: 5 Most Terrifying Money Moves“. It outlines some of the most the most common–and most costly–mistakes that people make in investing.

For more thoughts on how to steer clear of those financial zombies, check out our recent blog posts on 5 Traits of Successful Investors and 8 Investing Blogs that Won’t Make Your Head Hurt.

 
Image via sth

 
Individual Retirement Accounts (IRAs) are retirement accounts that you can start outside of your workplace. They have tax advantages to encourage you to save for retirement, but also penalties to discourage you from withdrawing before retirement.

There are two primary types of retirement accounts: a Roth IRA and a traditional IRA. With a Roth IRA you put in dollars after paying taxes and never pay taxes again, and with a traditional IRA you can contribute pre-tax dollars (which grow tax free) and then pay taxes when you withdraw the money.

The important thing to understand is that you can buy lots of different things in an IRA: you can buy stocks, bonds, mutual funds, or even FDIC-insured savings products. IRAs have contribution limits, and income tests, but they also have certain provision where you can borrow to fund education or a down payment on a home. They are a great and simple way to start saving for retirement, particularly when used in addition to a workplace plan.

Learn more about IRAs here.

Still, there has to be a good place to start for beginners who want to read about investing without making their head hurt right away. Here’s a list of blogs that we think fit that bill. Some of them are investing blogs on their own, and some of them are really personal finance blogs that also cover investing. And worry not. In future posts we will also provide a list of more advanced investing blogs so you can keep moving if you’ve mastered the basics.

SIMPLE INVESTING BLOGS

 
The Oblivious Investor
http://www.obliviousinvestor.com/

This is a great blog that keeps it simple, which is what we like best. Mike, who writes the blog, is a former financial advisor, and is transparent about just about everything, including what his personal retirement portfolio is invested in. In general, on this blog you will find simple investing strategies that are easy to understand and leave out the day-to-day stock market madness that most other investment professionals gobble up.

Carl Richards @ The New York Times Bucks Blog
http://bucks.blogs.nytimes.com/author/carl-richards/

So much of investment success is determined by the investor’s behavior. Carl Richards is known for his simple sketches that elegantly encapsulate key ideas about investing. In his blog articles for the New York Times he talks about the process of investing rather than specific investments and he challenges us to look at our own behavior when we approach investing.

Amateur Asset Allocator
http://amateurassetallocator.com/

This is a refreshingly simple blog that covers practical investing topics. The point of view is realistic and no-nonsense, as in this post that states the obvious when it comes to investing but too often gets ignored: If it seems too good to be true, it is. The “Best Of” section is a good place to start.

BuyLikeBuffet
http://buylikebuffett.com

Aside from having everyone’s favorite investor in its title, this blog has a good sampling of different types of investing topics. They track individual stocks a little bit, but they do it without getting too technical so it can be a good starting point. More importantly, the blog also covers general topics about saving vs investing.

PERSONAL FINANCE BLOGS WITH INVESTING SECTIONS

 
Some of the best resources for getting strated reading about investing are actually personal finance sites that have investing sections. They tend to focus more on the introductory investing topics and how investing can fit into your life, rather than getting into trying to predict stock market performance. Here are four good ones:

http://www.thesimpledollar.com/category/investing/
http://www.wisebread.com/topic/personal-finance/investment
http://www.doughroller.net/category/investing/
http://financialhighway.com/category/investments/

 
Image via threepin

Patience
Stock prices go up and down every day, but the value of your underlying investments doesn’t move nearly as much. All companies experience prosperous times as well as hard times, and the larger economy also has its ups and downs. But if you buy a good basket of investments, over time the winners will outweigh the losers.

Invest in what you know
This doesn’t mean that you need to understand the ins and outs of every business, but it’s generally good advice stick to things that make sense to you. Stay away from herds, because they tend to chase what’s popular now, and by the time it’s popular it is usually overpriced. If it doesn’t seem to make sense, it probably doesn’t.

Consistency
Create a plan and stick to it. The best way to invest is adding to your investment over time. That way, even if you come in at exactly the wrong time, you can buy on the down slope and get a good average price.

Know your limits
If you don’t have the ability to watch the value of your portfolio bob up and down in the short term, stay away from investments with rapidly changing prices, because you won’t be successful. If you aren’t prepared to dive into company financials or investigate an industry, then stay away from individual stocks—mutual funds are your best bet.

Don’t invest what you have and need for what you want
Investing has its place in your financial life, but so do savings and cash. We all have emergencies in our life, and we have short-term goals. If you invest money that we need in the short-term, it’s hard to be committed and patient–and if you can’t be committed and patient, it’s hard to be a successful investor.

Image via HarshLight

Of course, we have dispelled those mistaken beliefs elsewhere, but even taking that into account, a very large percentage of people would not characterize themselves as investors.  However, whether you think so or not, you are already an investor, and further, you already understand and adhere to some of the major tenets of successful investing.

 
What investing is

Before we move further, let’s clarify a central term: investing.  For all its connotations of money and stocks, it’s really a much more versatile term.  ”Investing” simply means that you take on a commitment or activity today with the expectation that it will produce greater value in the future.

 
Now you see where we’re going

With this broader definition in place, I’m sure you can start to envision the investments that we make all the time:

• Getting an education
• Making home repairs and improvements
• Buying energy-efficient appliances or a car with better gas mileage
• Working as an intern (either paid or unpaid)
• Learning new skills on the job
• Starting a business

 
All of those items have at least some relationship to money—they improve your earning potential, or save you money in the long term, or open up new employment opportunities.  But many of them also pay other dividends: a reduced impact on the environment; an enriched view of the world; a more fulfilling profession; or the satisfaction of seeing a direct correlation between your contribution and your success.

 
Investing isn’t about today

All of the examples above have something else in common: they are all about the future.  In fact, real investing is always about the future.  It’s about trading something you have now for something you want later.

This is certainly the case for businesses.  As an example, drug companies spend many years and huge amounts of money bringing new medicines to market.  (Estimates for the average cost to bring a new drug to market range from $55 million to more than $1 billion.)  They know that it make take years to see a return on their investment, but they expect that it will turn a profit in the long term.

The same is true for individuals.  One report pegged the average cost of a private four-year college education at more than $35,000.  However, the Bureau of Labor Statistics shows that the unemployment rate for those with only a high school degree is more than double that of individuals with a bachelor’s degree.  And perhaps even more compellingly, the US Census Bureau estimates that, on average over the course of a lifetime, those with a bachelor’s degree will make almost $1 million more than those with only a high school degree.  That initial investment is starting to look pretty good, isn’t it?

And the examples could go on and on.  As you help your child with her homework, or care for a tree in your yard, or go out for a morning jog, you are making investments in your future.  You are banking on the future as you take each of those actions.  You are an investor.

 
OK, so I’m an investor—but isn’t financial investing a whole other ball of wax?

The same kinds of criteria you consider when making non-financial investments are useful in financial investments as well.  The lessons you already know from your daily life can help to make you a savvy financial investor—and demonstrate that it needn’t be as complicated as you think:

• Sow today, reap tomorrow: Warren Buffett once said, “Someone’s sitting in the shade today because someone planted a tree a long time ago.”  The point is a good one—making an investment, and then giving it time to work, is critical in investments of all kinds.
• Make investments that are appropriate for your goals: If you are a computer programmer and want to improve your professional qualifications, taking a knitting class isn’t going to help much.  It would be much better to get familiar with changes in development patterns and methods, or learn about specific skills that are in high demand.  Similarly, as you make financial investments, choose those products that make sense for your investment goals.  For example, if you want to set aside money for retirement, choose reputable long-term investments, such as equity-based mutual funds.
• You don’t have to figure it all out on your own: If you need to patch a hole in your wall and you don’t know how, the best thing to do is find someone knowledgeable who can help you learn.  In financial investing, it makes sense to consult reliable sources of information.
• Don’t let short-term setbacks define your future: In your career, it’s likely that you’ll encounter some negative feedback or frustrating interactions from time to time.  The same is true for investing—all investors have periods where their investments lose money.  It’s easy to want to jump ship when investments are going down, but those who stay the course are much better off.

 
Financial investing needn’t be any more complicated, difficult, or scary than any of the other investments you make every day.  In fact, as we’ve just seen, you already know the lessons that can make you a successful investor.  Now—put those lessons to work!

Image sources: books via timetrax23, medicine via Denise Mattox, tree via joiseyshowaa