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What Steve Jobs Can Teach Us About Investing

February 9th, 2010 No comments

In the past 10 years, Apple has been a great investment. The success of their mp3, cell phone, and the rejuvenation of their computer business has been remarkable. If you look at the record of technology companies over the same 10 years, it’s been quite tough. With a few exceptions (Apple included), technology stocks have been poor performers. 

Most of the credit can go to Apple’s CEO, Steve Jobs. My first experience with his products came at school. When I was in college, Jobs started a company called NeXT. At the computer lab at school, I saw a demo of his new computers. They crashed, but once they got them going they had impressive features that current PCs didn’t have. It was some of this technology that Jobs brought with him to his second stint at Apple that eventually made it to the current Apple computers.

The question is would it have been possible to find Apple and invest in it before this rejuvenation happened? And if so, what criteria could you have used?

According to Joe Ponzio, a value investor, Apple would not have been a good investment based upon its cash flow at the time prior to the launch of its first real blockbuster product, the iPod. So, if you asked ‘Would Warren Buffet Buy This Stock?”, the answer is likely no because the financials don’t look good. 

If you don’t want to consider the financials, then another reason to invest would be to have some knowledge of the future products or other technical information that would lead you to conclude that there is a lot of unrealized potential. There is no other insider more knowledgable than Steve Jobs himself.

So, what did Steve Jobs do? In this article written during the previous bull market that existed in 2007, he traded in some options that were under water for a fewer number of shares that he took possession of. These shares currently had value while the options did not, so at the time this looked like a good decision.

As the article pointed out, that decision cost him over $4 billion. I have no doubt that Jobs believes in his products and is passionate about Apple. But, if Jobs really thought that his company was undervalued  and had lots of growth left why would he trade in his options? If the ultimate insider didn’t see the bull run that occurred with Apple, how could anyone else have expected to see it?

Only by chance.



Understanding Liquidity

February 5th, 2010 No comments

In this post I talk about liquidity and how to use it in your own finances.

The idea for this post came from one of my friends who is making a pretty large error in his personal finances. He is borrowing one of Suzie Orman’s big ideas: pay off your mortgage as soon as you can by prepaying principal and once it is paid off leave it un-leveraged. This isn’t a bad idea in itself, but he is structuring his finances toward this goal to the detriment of other parts of his financial life.

The other big issue in his life is his job security. Over the past few years, his job has been under threat due to global competition which has increased his anxiety as well as resulted in lower job quality and smaller pay over time. He is working on this issue by getting a certification and actively using his network to plan ahead for the next position (this is good).

This is the second time around, though this time he hasn’t been laid off yet. The first time he was laid off, his savings plus unemployment would have lasted about 6 months before his cashflow was an issue. Fortunately,  he found a job in about 3 months.

What happened after the first layoff is where the problem re-develops. What did he do? He continued spending after getting the next job, including a bunch of (borrowed) money to improve his home plus miscellaneous spending. He’s paying down his mortgage with additional principal. It’s been a number of years later and he still really hasn’t improved his financial situation. He is still vulnerable to a job loss.

There is lack of understanding or actually a lack of will on his part to address his situation and see how he can improve it. I don’t want to address the psychological issues, but the finance issues. Even though on paper his net worth is increasing, the steps he is taking has reduced his financial liquidity, which is the ability to generate cash easily without a reduction in asset value (selling for a loss, or below market price).

The damage a lack of liquidity can cause can been seen by what has happened over the past year in the economy.  Many companies are failing due to lower cash flows that aren’t covering debts, along with a broken credit market that has limited the ability to refinance the debt.

Using my friend as an example, these are the steps he could take to increase liquidity. Increasing liquidity would help to reduce his anxiety by increasing his ability to generate cash and increase cash reserves.

Sell The House

The psychological need to payoff the house is driving his anxiety over his job situation. This anxiety could be eliminated if he simply sold the house and rented an apartment or home. Instead of being on the hook for say, a 20 year mortgage, he would only be on the hook for an apartment lease of, say, 1 year. Also, the equity he would realize would be cash in his pocket. This decision would leave him in the most liquid position.

Refinance to a Longer Term

In my posts that gave you tips to refinance a mortgage, I talked about how to save money by reducing the total cost of your mortgage.  If you want to save the most money on a refinance, you would take a new loan with a shorter term. If you want to increase liquidity, you would want to do the opposite and take on a new loan with a longer term. This new loan would free up money each month because it will have the lowest payment. See Example #1 in the calculation post.

Stop Prepayment of Principal

When you pay extra money on your mortgage above the monthly payment, this reduces the total cost of the mortgage. However, this doesn’t affect the payment each month, it still remains the same. So this reduces your liquidity.

Don’t Fund Home Improvements

Paying out money to improve the home is less money available to pay the mortgage in the future. Even worse, he borrowed additional money to pay for the improvements which effectively increased his mortgage payment.

Spend Less, Save More

If he improved his cash flow by spending less, he would have more money available in the future to handle any income interruptions. He does not  plan spending or have a budget.


When looking at your own finances, you need to evaluate your own financial situation and make the appropriate adjustments to find your optimal comfort level.

Categories: Investing Tags: ,

Investing Basics

February 4th, 2010 No comments

What exactly is an investment? There is the dictionary definition. Investments can be many things, not limited by those of a financial nature. In the realm of finance, there are all sorts of things that can be investments. The easy part is defining what an investment is or is not, the hard part can be finding the ones that payoff, or in finding investments in places where it is not necessary obvious.
Read more…

Categories: Investing, Make Money Investing Tags:

Finding the Cash in your 401K

February 3rd, 2010 No comments

If you have investments in a regular taxable brokerage account, it’s easy to find your cash. When you fund your account, the cash is deposited in some form of cash investment such as a money market fund. In your 401K account, where is the cash?

It’s not where you may think it is and it usually has a different name.

Look at your 401K, the investment choices usually fall into the following categories:

  • Stock Investments: Large Cap, Mid Cap, Small Cap, International
  • Bond Investments: High Yield, Bond, Stable Value
  • Mixed Investments: Blend, Equity Income
  • Lifestyle Investments: Target Date funds.

Here’s the Cash

There will likely be different names depending on your 401K account brokerage company. But, the ‘cash’ investment will be named with some variation of ‘Stable Value’ or ‘Money Market Fund’. The term ‘Stable Value’ means that the investment tries to keep its par value (never lose principal).  If you are unsure if your investment is  stable value, check the prospectus and look for this wording.

The Stable Value investment is similar to money market funds that you would find at your bank or in your taxable investment account.

Where the Cash Isn’t

In one of my 401K accounts, the stable value fund is lumped in with other ‘Bond Investments’. Don’t make the mistake of putting your money in a bond fund thinking that it’s cash. It isn’t. Bond funds are not created to maintain par value, they can lose principal.

Bond funds are more like stock investments, you should treat them the same way. Bond funds trade bonds. It is possible to make and lose money trading bonds, just like with stocks. 

Move Into Cash

Now that you know where the cash is, move some money over there, either with an exchange or perhaps in your allocation of new money. It’s a good idea to have some cash in your portfolio to take advantage of market downturns. 

Categories: Investing Tags: ,

Fire The Post Office

February 1st, 2010 No comments

Is it possible to conduct all your correspondence without the Post Office? Probably not, but it is possible to automate your financial transactions where the USPS is minimized. There are always going to be cases where mail won’t be replaced soon (wedding invitations, e.g.). We don’t need mail to send letters anymore but a mailed hand-written letter or card still has more significance today because it is rarer.

The USPS has recently changed its pricing to allow for inflation adjustments. Each year, the price of postage will likely go up at least 2 cents. Already, the cost of postage has made certain correspondence uneconomic to use the USPS. Don’t worry, because here’s how you can fire the USPS.

Eliminate Mailing Checks

The first step to firing the USPS is to setup Bill Pay. This will eliminate sending outbound mail that you need to send. This will save you both time and money, as I discussed in a previous series of articles.

The reality of Bill Pay is that there will still be paper checks sent out, so the USPS will still be involved. However, you still get the benefit of not having to take the time to write the check and mail the letter yourself.

Go Paperless

Next, take on your inbound mail. 

There are financial related mailings that you get that do not require action on your part – these are bank monthly statements, investment trading alerts, investment quarterly statements/proxy voting alerts, credit card statements. Institutions have already made a lot of progress in this area over the past years. I have accounts that have been paperless for years now.

To go paperless on these accounts, you will need to fill out a disclaimer on the account website for each company. When these documents are ready you will instead get an email message. For some correspondence, there are legal requirements that you be notified – e.g., stock trades, so email notification is required to stop the mail.

Some companies have taken an aggressive stand on this – they will charge you if you want to continue to receive documents in the mail. 

If you are comfortable will paying your bills online, take the next step and Go Paperless for your bills. I currently have the following bills setup to be paperless: credit card and  cell phone.

Now, the Real Prize

The next generation of bill payment services will offer the ability to automate the billing part as well as the payment part. This means that your paper bills won’t go to your mailbox, but will go directly to your bill payment service. How’s that for service? In the future, these interfaces will become fully electronic on both ends so that no paper is sent anywhere. 

In a future post, I will talk about this innovation once I start using it.

Categories: Lifestyle Tags: