If there is a takeaway from the financial crisis of the past five years, it’s this: take financial mass media with a grain of salt. Journalists exist to get the ‘story’ and that story has been to talk about all the problems in the economy. Prominent in this discussion has been the poor housing market.
When the crisis was developing early, we heard about all those explosive adjustable rate mortgages (ARMS) that would eventually catch homeowners by surprise. These fancy mortgages which were common towards the end of the bubble are in fact time bombs because the loan terms weren’t based upon typical criteria of a down payment plus a payment schedule to pay the interest and principal back. They were manipulated mortgages with lower payments (for a period) that masked the actual costs in the expectation that a future mortgage would be bought with better terms.
We don’t here much about ARMs anymore because anyone who had an ARM under normal mortgage terms is absolutely a winner in this crisis today. This doesn’t make for a good story.
The traditional world of investing is kind of boring. Unfortunately, the more boring you are the greater the likelihood that you will succeed at investing. The fact remains that if you buy good companies and wait around watching corn grow you will more likely be successful.
Just look around. Everything that’s happened the past 5 years, and I can still rattle off great companies that continue to perform well and the market demonstrates that success with higher pricing. If you simply went away and hibernated for 5 years, you would have missed all the drama and would have been better off for it.
But, and there is a but here, you need stimulus to keep everything interesting. New tools and software have arrived that can make investing better, more social and even fun. One of the ways I kept investing interesting was investing small amounts of money in many different stocks. These positions were really too small to make any serious dent in my portfolio but it was fun. This activity was quashed after Zecco eliminated the monthly free trades.
The past ten to fifteen years we have seen multiple corrections and bear markets. If you allow the market gyrations to change your behavior based upon emotion rather than logic you will be more likely to lose money.
The key to getting control of your emotions is to look at what’s really going on in individual stocks and ignore the chatter and noise of the market that goes on each day.
This is hard to do sometimes, I’ve noticed that I sometimes get too worked up about this noise only to miss the mid to longer term trends that are going on in companies that I own or might want to own.
Is it possible to save more money than you earn? Depending on how you want to look at the math, it is. The key to the math is to look at your earnings the same way your company does: total cost of payroll.
It should come as no surprise that the cost of an employee is more than the money you earn. The company likely has to pay for benefits such as medical insurance, workers compensation, disability costs, retirement costs and many other expenses.
Before you even start saving on your own, consider fully what your company can offer you in benefits for savings. The most advantageous kind of savings a company can offer you is what is called deferred compensation. This is money that you or the employer can set aside for future consumption.
We are currently seeing a correction in U.S. stocks of about 5% from the high reached by the major indexes a few weeks ago. What makes this correction noteworthy is that there were analysts pounding the table about ‘sell in May and go away’ as well as the need for a correction. These things usually occur when people don’t expect them, this correction has been the worst kept secret.
A 5% move doesn’t sound like much, but keep in mind that many quality stocks have underperformed on top of the correction. So a move by the market has exacerbated their under performance. A good example of this is McDonalds (MCD) which has underperformed the market by over 16% YTD and can be called as being in a correction.
The adage of “buy low, sell high” works especially well when the market itself forces stocks down for reasons not having much to do with the fundamentals of a company. If you are invested in Fossil (FOSL) or Chipotle (CMG), we did see significant news about their earnings that will force you to assess your position. The market showed no mercy on these high growth stocks gone wrong since the market had previously priced them for perfection.