Financial Retard of the Month, February 2012

February 29, 2012

 

Smile!

 

We were all set to give this month’s award to Trent Hamm yet again. Trent has made the Financial Retard of the Month his to lose, commandeering it like Bobby Orr did the Norris Trophy and Hank Hill did Strickland Propane’s Employee of the Year. We had Trent’s name on the plaque and were ready to request another acceptance speech that he was doubtless itching to give.

And then, everything changed like a flash of lightning. In the most stunning rally in the brief history of the Financial Retard of the Month honors, Kris at Simple Island Living came from several points down to fire past Trent and all other comers. She first came to our attention with this comment, from another contestant’s recent Carnival of Wealth submission:

I just looked into [food stamps] for our family when I became unemployed. In Hawaii, there is an asset test ($3k in assets or less for a family of 3) you have to pass in order to qualify for welfare like food stamps. The only reason I qualify for state health is because I am pregnant and my son is a minor. If those weren’t the case, I would be shelling out $800 a month for healthcare for the two of us.

The one thing I do disagree with you about is the use of food stamps for organic food. When it comes down to it, getting organic milk for my son is extremely important for me because he is 19 months old. When a child is that young, if it is possible to get milk that is free of hormones it is, to me, one of our higher priorities. It’s just that their bodies are so fragile and while he’s so young, we want him to be as hormone and pesticide free as possible.

Apart from that, if you’re talking millionaires who are on food stamps and getting their organic truffle oil, well then, perhaps a touch of reality would be good for them.

Two paragraphs of why she needs other people to support able-bodied her, followed by an indignant slap at other people who have chosen to do the exact thing she did – take advantage of a political construct that allows the unproductive to flourish on the backs of the productive.

We touched on this in the linked post, but in her position as an unemployed mother of one (with another en route), Kris has chosen to live a gratuitously costly lifestyle that used to be the exclusive province of rich people. It wasn’t that many years ago that insisting on expensive organic milk (by the vernacular definition of “organic”, not the true definition) for your fragile offspring was a symptom of being idly rich. Being privileged enough to find death and mayhem at every turn in the grocery aisle was a status symbol, one that showed you were beyond concerning yourself with philistine worries like simply buying whatever milk was cheap.

But today, you can have discriminating tastes while being on food stamps. It’s the democratization of insanity.

So here we have a woman who collects largesse that’s “free”, without ever thinking about where and from whom the resources originate. On the surface that sounds like an eminent disqualification for blogging about personal finance, but what do we know?

Shame used to be something of a motivating factor for public behavior. Maybe it still is, in some backward and less enlightened parts of the planet. But as for now, impunity reigns supreme. Want to finance an education without estimating its costs and eventual benefits? Why not? If you end up borrowing more than you can ever pay back, demand clemency. Then again, in a society where a corporate executive can run a multibillion-dollar company into the ground and expect (and receive) taxpayer support, or when the political appointees who run the superfluous secondary mortgage market can escape with billions, why shouldn’t a simple housewife spend money on something less vital and more fun than inexpensive supplies for her toddler?

There are millions of leeches in this formerly robust country. What makes her so special?

We’ll let our subject handle it:

We’ve been planning our anniversary trip for a year – saving up for it for two years.  Since we were married on Leap Day, my husband decided that very (sic) four years we would take a trip, thereby warding off the stereotypical flowers-dinner anniversary that most anniversaries default into.  Since we have a toddler, I tried to think of something that would be toddler appropriate while still being a blast for us.  What did I think of?  Disney Cruise!

We’ll be setting sail on the Disney Wonder next week.  It had a special “kids-sail-free” special going on, which made our balcony room (all included meals) about $2K.

Is it expensive? Sort of.  We bought the extra trip insurance because I’m pregnant and we have a toddler – in case the doc had put me on bed rest or something, at least our trip would have been covered.  Since we did, though, it comes out to around $350 a day for the 3 of us.

It is a bold departure from our honeymoon trip…We also got tipsy and went to an art auction.  Not a good idea.  Don’t recommend it.  Buh-bye moolah.

Buying stuff with no utility, while drunk. How did we forget to include a chapter on that surefire wealth-building method in Control Your Cash: Making Money Make Sense?

But in reality, we are excited.  Happy to be getting away from my current drama…

Every woman in a similar position seems to have some form of “drama”. Like many of our previous honorees, this month’s is suffering from the shellshock that affects so many of our returning Iraq vets.

Just kidding, of course she isn’t. No, she has a husband and a kid and another on the way. She lives in a place that millions of other people pay good money to visit. Her “drama” consists of not looking too hard to find a job, and then again, why should she seeing as she’s a few months pregnant?

In the paragraph about trip insurance, we’ll assume that she submitted to pronoun confusion and that the $350 a day refers to the cost of the cruise + trip insurance, not just the trip insurance itself. Assuming it’s the former, that means she’s paying $450 in trip insurance. Or as the trip insurance provider calls it, the easiest damn money in the world to make. A gigantic premium for essentially no work and no risk.

And happy to pretend for a second that our life isn’t quickly becoming, well, sort of ghetto (I duct-taped my kids diaper today because it ripped.  Is that normal?)

Given the comments and responses to that last line, we’re assuming it’s not hyperbole and that she’s being sincere.

So that’s $2450 for a cruise plus trip insurance. She said she’s going to buy a sombrero, so we’re presuming she’s taking Disney’s week-long Mexican Riviera junket. Which would also entail schlepping the family from Honolulu to Los Angeles and back. Which is probably at least another $1000 or so.

Even better, this post follows up one on her blog entitled “socially acceptable stealing…right or wrong?” She’s talking about company office supplies, etc., but no one mentioned whether going on cruises while sucking at the taxpayer breast qualifies. But it should. It’s clearly stealing, and God knows it’s now socially acceptable.

Trent Hamm became our go-to subject for Financial Retard of the Month because of his pathological attention to the small picture. (His sanctimony, lack of humor and stubbornness were just gravy.) But that being said, he’s worth emulating in every way if the alternative is this. Which is worse – having the wherewithal to lead a comfortable life and refusing to, or having no wherewithal yet overextending yourself to lead the comfortable life anyway? Going on a weeklong cruise while duct-taping diapers. Trent would duct-tape diapers because it’s fun, not because it’d save a few dollars he could then spend on a tiny percentage of a cruise that he shouldn’t be going on anyway because he’s collecting health care and food benefits from his fellow citizens through the conduit of a state agency.

Oh yeah, the award. The February 2012 Financial Retard of the Month honoree is not Kris of Simple Island Living. There’s somebody far more complicit here. It’s you, the American taxpayer. (Assuming you’re among the 80% of our readers who are American, and among the 50% of those who pay taxes.) Congratulations on letting a system that allows this kind of abuse to grow roots, and good luck ever getting it modified. Take a look in the mirror and embrace your retardism. You earned it.

Filed Under: Financial Retard of the Month, Making Smart Choices Tagged With: , ,

Dividends, Yes. Yields, Not So Much

February 17, 2012

What can a common thief tell us about investing?

 

Dividends are great in and of themselves. (See our recent post on dividend yields.) Dividing them by another quantity, such as the price of the underlying stock, is a distraction at best and misleading at worst.

The S&P 500 came up with an easily calculable set of presumably desirable stocks called the “Dividend Aristocrats”. It works like this: a talent agent gets a phone call from a guy who says, “I have this amazing act. It’s me, my wife, our daughter and our son…”

Alright, it really works like this. The S&P defines a dividend aristocrat as any company with a $3 billion market capitalization, at least $5 million of which changes hands on an average day. And the company must have increased dividends every year for the last quarter century.

This is venturing dangerously into technical analysis territory (i.e., looking at charts instead of fundamentals.) Furthermore, it gives no leeway. A stock that pays a 25¢ dividend one year, then pays a 25¢ dividend the next, even when the consumer price index has risen <1%, doesn’t qualify.

Worse yet, the dividend aristocrats method looks a little too closely at past performance. Yes, what a stock did is important. What a stock did 25 years ago, back when it had a different management team and board of directors, is less important. Whatever the company is and whatever it does, its place in the economy did not remain unchanged. Since 1987, paper manufacturing got a lot less important, and internet search a lot more, but even the industries in the middle moved in some direction. And that movement could well have compounded every year. Fully half the companies on the Dow of 25 years ago are no longer there. (14 of them were replaced, including a couple that went bankrupt, and the 15th, Texaco, merged with Dow stalwart Chevron.)

Please understand that you need to look at more than indicators before committing to a security. Remember, a stock price is nothing more than an opinion. A consensus opinion, really, or a combination of opinions distilled into one number, but one formed by opinions nonetheless. That means that a stock price is as fickle as your teenage niece’s musical tastes.

Wait. I thought this post was about dividends, not stock prices. 

It’s about dividend yields. We’re saying that the denominator of a fraction is just as important as the numerator.

More to the point, the two are only tenuously related. Sports analogy coming up.

Cam Newton led the NFL in yards per rushing attempt this season at 5.6 (among all players with at least 7½ carries a game.) That makes him the most valuable running back in the league, doesn’t it? If he were a free agent, any team that signs him and makes him their primary running back would be guaranteed a Super Bowl victory, right?

Yeah, except he rushed for only 706 yards. (Primarily because he’s a quarterback, not a running back.) We’ll take Maurice Jones-Drew’s additional 900 yards, thanks.

The very phrase “dividend yield” implies that the dividend is somehow connected to the stock price. It isn’t. The dividend is connected to whatever the management team wants to pay out. More to the point, the managers have to set the dividend low enough that it doesn’t eat up too much of the company’s profits, but high enough to attract investors and keep them happy. (Keep in mind that the managers and directors themselves own plenty of the stock themselves.)

CME Group is the parent company of the Chicago Mercantile Exchange, and also owns at least a piece of several other exchanges. (What, you thought stock exchanges were public utilities, like the water company?) CME Group also owns the Dow Jones indices. We’re not sure how you can own numbers, but CME Group manages to and with a market cap of $19 billion, they don’t need to answer to us. CME Group paid dividends totaling $8.92 per share last year. The company will not be folding nor becoming irrelevant anytime soon.

The raw number – $8.92 – is more meaningful and more attractive than the dividend yield. That’s because CME Group trades at about $285. Yes, it costs a lot to own a standard lot of CME. That’s the point. 100 shares will cost you most of America’s per capita salary, and give you an annual payment of $892.

Are high dividend yields better than low ones?

Don’t answer yet. Let’s rephrase it slightly.

If you’re a CMG Group shareholder, do you want a high dividend yield or a low one?

You want a low one. For the dividend yield to lower, the dividend itself would have to lower. Or, what’s far more likely, the stock would have to appreciate. Chase dividend yields, and you start chasing perversions. Who cares what the dividend is doing relative to stock price? Lots of people do, but they shouldn’t. A stock like CME, trading at only 10½ times earnings, with positive cash flow, 60% off its 2007 peak, with net income increasing every year, is a bargain. And on no one’s list of dividend yield champions.

This article is featured in:

**The Carnival of Personal Finance #349**

Filed Under: Investments, Making Smart Choices Tagged With: , ,

GUEST POST: The Art of Investing For Profits – AKA The Uncommon Sense

February 10, 2012

Remember when the Carnival of Wealth was hosted by Arohan of Personal Dividends? He was the Jack Paar to our Johnny Carson. The Al Atkins to our Rob Halford. The Blue Ribbon Sports to our Nike.

After handing off control of the CoW to us, Arohan took off the superhero mask and identified himself as Shailesh Kumar. He now runs Value Stock Guide, where he admits to a long history of antisocial behavior (at least when it comes to investing in stocks.) And he wrote today’s post. Subscribe to Shailesh’s newsletter, if you can handle no-frills stock advice. Or not. It’s your money after all, we don’t really care.

Investors are a fickle bunch. They move in and out of stocks for reasons that have not much to do with the business fundamentals. The general perception of the economy and the expectations of the future stock market returns define how most investors behave. Unfortunately, they generally do the very thing they should not be doing and don’t do the thing they should be, exacerbating the boom-and-bust cycles the stock market continues to go through.

This may sound strange, coming from a value investor who mostly relies on company fundamentals to find value stock picks. (Value investors tend to have their heads in the sand and ignore the behavioralists as quacks.) But the general economic sentiment changes investor behavior in a way that has a detrimental effect on their portfolio performance.

The Feel Good Bubble

“Irrational Exuberance” is how Alan Greenspan described it. This period is characterized by a climbing stock market, strong real estate sector, low unemployment rate, high consumer spending and a general feeling of financial security that leads people to believe that the good times are here to stay and they can continue to binge on their credit. This is also the time when most investors are brainwashed into thinking “this time it is different” by the media and the pundits (who generally have a vested interest in seeing that the bubble continues as long as it can). So rising stocks rise faster as investors throw caution (and investing common sense) to the wind, and pile on.

Unfortunately, more and new investors are also drawn into the market with the lure of quick profits, when they see the Joneses buying new toys that no longer fit in their garages and vacationing in far-away dreamy lands.

The result is that when the bubble bursts, most people end up with assets bought at high prices, overextended credit, dysfunctional marriages and gloomy job prospects.

The Economic and Investment Recession

The inverse of irrational exuberance is, of course, rational pessimism that changes the hitherto rose-colored lenses to dark gray. It is perverse that at the times when opportunities abound, humans have the uncanny ability to turn inward and refuse to answer the knocks on the door. Making matters worse, the scars of investments gone sour so affect the psyche that these investors continue to pull out of their investments at the most inopportune times.

It is as if the herd has unanimously decided to fall off the cliff. Investors lose the ability to look around and make a rational decision about the environment they find themselves in. Their complete focus is on getting out before it’s too late.

It’s already too late.

When the cycle bottoms out, most people end up with assets in cash and under the mattress, with their investments sold at low prices. If they have exercised better sense in other areas of their lives, perhaps their marital bonds are stronger and they have made the effort to pay down their credit debt.

Break Out from the Herd If You Want to Profit

The basic premise of successful investing is “buy low and sell high”. Common sense, right? In reality, it is really, really hard to do. As soon as you let your emotions, hopes, and fears rule your investment decisions, you lose. If you give in to your inbuilt urge to be seen doing the same things that you see others doing, you lose. You need to detach yourself from these blocks and social niceties and start making investment decisions on their merit.

Unlike other financial bloggers who will list 101 tips to investment success, I will only give you 2:

  • Sell on the high – When the markets are high, or your stocks have gone up beyond your judgment of their value, sell. Ignore all the voices on the TV, around the water cooler, and in your head that keep telling you that the stock will go higher. So what if you lose out on a few more percentage points of appreciation? Real money is not made on your sale price. Real money is made at the price you buy the stock. When the asset tops out, you want to be in the cash, not invested in the asset.
  • Buy on the low – If you believe that things can’t get any worse, and that the world is coming to an end, then know that you are not the only one who believes this. The weak hands have already sold or will do so soon. Investors who are still holding are doing so for more fundamental reasons. If you have been practicing the “Sell on the high” concept, you have cash to invest. This is the time to choose which stocks you would like to buy. Choose wisely – this will determine your returns.

There is no precedence of the world ending in the history of mankind, as far as I know.

Breaking out from the herd is hard to do at first. But once you do it and see the results, you will be able to give that “knowing smile” to the poor saps who dole out stock tips from the bar stool. Not that you will hang out with them any more.

Filed Under: Investments, Making Smart Choices Tagged With: , , , , , ,
« Previous Page
Next Page »