Taking Control Over Savings and Investments | taking control over money | Donna Fielding

HOW I PICK STOCKS

Thu, 19 Jul 2007 08:59:34 -0400

Stock picking is an important skill for anyone who wants to invest in the stock market and buy individual stocks. Back in the old days, anyone who wanted to buy stocks had to use a broker and pay some hefty fees. Now, however, you have a choice between many online brokerages that can offer smaller fees for trades. I started out with Scottrade which offers very low fees and is increasing its research abilities; however, it was not great when it came to options trading. Thus, I recently switched to OptionsXpress. Although it is 14.99 per trade (as opposed to Scottrade's $7.00 per trade), it offers me more information on options' trading. I DO NOT RECOMMEND THAT ANY OF YOU BEGIN BY TRADING OPTIONS. They are a lot to learn about and I have not yet decided whether or not buying options makes sense in my portfolio. I will get to that at a later date.

For those of you who want to learn about how to find a good stock (for investment or trade), here are my steps (explained in detail).

So, these are my steps:

1. READ, READ AND THEN READ SOME MORE. In order to research a stock, you need to really get a list of names to research. Where do you get those names? There are lots of places: my favorites are thestreet.com, the Wall Street Journal, Motley Fool, SmartMoney.com, Smart Money Magazine (my absolute best picks have come from there), Money Magazine, MSN.com's top 50 picks, and shows on CNBC such as Mad Money and Fast Money. Every day I read the Wall Street Journal, the NY Times Business Section and, every Saturday, I go out and buy myself a Barron's (which may be one of the best stock market publications out there). I used to put all my ideas on pieces of paper; now, I try to write them in a journal. I can then put all my research into the journal as well as an idea of what would be a good price to pay for the stock and a target price for exiting the stock position.

Do you need to use all these sources? No. But if you don't have a broker, you need to start reading and making note of stocks that seem to have something good going for them. I probably go a bit overboard, but I am cautious about my stock picks and naturally curious. I also pay for some other research: a premium service from thestreet.com, Real Money Silver -- however, I only recently added that. I don't think you should pay for advice until you are making some money and have a system.

2. FUNDAMENTALS MATTER. What is it you are looking for in a stock? Many people have many different ideas about what matters in choosing a stock, but what you are trying to do when you research a stock is figure out what the company does, who is going to need what it is offering, how much need there will be, and how well they are managing what they do. Obviously, markets change all the time; thus, what's in favor today may be out of favor tomorrow and vice-versa.

It may sound simple, but, regardless of everything else, you are looking for a company that will have a higher stock price from where you are buying it within a certain period of time. Even if you tend to buy and hold, you want to be holding a stock that is going to raise in value at some point in time. That may mean buying something today that is out of favor, because you think it is a good strong company. But certainly, you expect that company's stock price to go up. Otherwise, why buy the stock?

Thus, how much it a stock "costs" now compared to where it "should" be is a factor. However, many believe that the market is "efficient" and prices stocks correctly every second of every day. Obviously, what you want is to find a stock in a company that is growing, or a stock that has, for some reason, gone on sale. Either of those two things will, presumably, get you a stock that, over some time horizon, ought to go up.

Your time horizon is important; I like to think about 3-6 months out for a "trade," and years out for an "investment." While many people believe in buy and hold, and, I may be coming around to that belief in my IRA account, I really prefer to manage my money by getting into positions at what I believe to be a good price and getting out of them in one of two events: something changes my opinion about the company, forcing me to sell at a loss, or, I've made what I think I can make from the company at this point in time.

If you find a great stock that is growing, however, there is an advantage to buy and hold: the stock market moves quickly, and, if you get out of a stock thinking it has to come down and you can get back in later, it may zoom up without you ever having a chance to get back in on a downturn. Thus, I am moving to an idea of feeling confident with my decisions, and, at that point, keeping the stock until something changes my opinion about the company's prospects or I have wrung out of it all that I want to get out of it. That does not mean the stock may not go higher: it just means that I made a significant amount of money on the stock and can, therefore, let it go (at least for now). If you never take profits, I'm not sure that you can make money in the stock market. Plus, if you do not have cash "on the side," you'll never be able to buy something "on sale."

Also, sometimes, you can compare: it's your money you are trying to make grow; thus, if a stock you are in is not going to grow as much as another stock you are researching within the same period of time, you should sell the one and buy the other. But you should be confident, because, despite what the market appears to do on a regular basis, i.e., rise, it is not easy to find a great stock that is not too far overpriced that you cannot get in before it starts to go down. When you find such a stock, you might decide to stick with it through its ups and downs.

3. What are the steps to researching a stock? My method is to look at stocks through a series of moves all of which can be done on line. To show my steps, I will give you two recent example of stocks that I researched. My father-in-law, a great long-term investor, asked me to look at two stocks he was considering. Because he doesn't use the internet, yet, he wanted me to do my thing with my research before he made a decision. One of them is called Dryships (DRYS) and the other AngioDynamics (ANGO).

What did I do? First, I tried to get a feel for the stocks and how they have been doing lately. I usually start at Optionsxpress.com (my online broker) to get my first set of information: Cost, charts (which I'll get into later in the series) and basic financial information. I like to play with charts, but I'm really just getting a feel for the company. I read the news information on that site, and I look at the analysts' recommendations. All of that is right on my broker's web site.

My next step is msn.com (other people really like yahoo finance, and there are probably dozens of sites on the web in which to get basic information on the stock). Why do I use msn.com (money section)? I put the symbol of the stock in and poof, a wealth of information is at my fingertips. I look at their Stock Scouter rating (which tends to favor momentum stocks, but gives me a sense of what's going well and poorly for the stock). But I am not looking for msn's opinion. I am doing some analysis of a few key numbers for me, reading the editorial commentary and news and heading off to the company's website.

I look at company websites for a lot of different reasons. I view this research as similar to what an analyst would do if he/she were visiting the company. The website usually tells me a lot about a company: their style as well as substance." Actual analysts get to meet with company executives, tour their plants and look at their operations. They listen to their conference calls and go through their financial filings carefully. I try to do something to that effect on the computer. A web site gives me a feel for the business and helps me to see what the customer base is. I want to see if they are in the business I think they are in and how well they are executing their business.

Next, I head to CNBC.com. There I find out two things essentially: What Thompson financial thinks is the future price of the stock and how it has really done in the past few months/year period compared to peers. This is under the profile tab of the stock quote section.

4. What am I looking for? While I will later write a series of articles to explain a lot of different things I have learned about researching stocks, including mistakes as well as successes, here I just want to give you a basic sense of the types of things I look for before I decide to invest in any stock. Taking the two stocks, ANGO and DRYS, I'll tell you why I called one a "buy" and one a "watch."

First, as I said earlier, I am trying to answer the question: What does this company do and why is that business a good one in which to invest? AngioDynamics makes "replacement parts" for the body. It is in an excellent business right now because it plays on the theory of the aging baby boomer with their used up knees and hips from all of the activities in which we have participated. So far, so good. Dryships does exactly what it sounds like: it is a Greek company that ships dry goods around the world. That is clearly a growth industry given that the US economy is increasingly dependent on globalization. Hence, it is part of the cycle of imports/exports on which our economy relies and is in a good position to benefit from one of the major themes of our economy.

Secondly, I am trying to figure out: Is this company well run? That's where the "news" and editorial commentary come into play and where I heavily rely on the msn website. I can see if there are problems with the way the company does business. Their financial information is crucial (I will explain what you want to look for in a different article), but there are a host of things that can tell you whether or not it is a well-managed company. The news information is essential. For example, I learned that ANGO has patent litigation pending and the way I read the information, instead of dealing head on with their patent problems, they deflected questions about it. However, the patent dispute was in the area of a varicose vein procedure -- something that I actually think is a good business to be in and one I did not know, from the website, this company was in (again, that made me a little wary of the management of the company). Dryships, on the other hand, was much more postive. It seems to be a good company which executes its business very well.

Third, is this company in good financial shape? In terms of financials, which I'll explain in more detail in later posts, I am generally looking at cash flow, debt, margins and growth. This is why MSN's website is very good: on the side of each stock's page is a list of things to look at including the financial information that has been previously reported. Another excellent aspect of the site is that it shows very clearly the predictions about future growth.

Going back to my earlier examples of ANGO & DRYS, both companies looked good in terms of the financial information I like to use. Dryships has huge margins, and, while Ango has a huge gross margin, it seemed that its net margins were very low. That concerned me although I do not know whether or not this is typical of its business or whether this is a result of management inefficiency. Two things aided me there: first, CNBC allows comparisons to peers on a whole range of metrics. In this case, though, I used the CAPS service of Motley Fool and found out that the company had recently acquired another company and was having a bit of trouble integrating the new company. Hence, looking at gross/net margins might not really be meaningful for a few more quarters, while it settles in with the new purchase. Now, Dryships had a different issue that needed further research: debt v. cash flow. I prefer companies that have very little debt. Dryships has debt and later research revealed that its owner was the owner of an earlier shipping concern that had a lot of financial difficulties. The article did satisfy me that Dryships did not have the same concerns as the earlier company; however, the debt is a negative in my mind.

Finally, what do the analysts say about the stock's prospects? Every one of the websites I have mentioned generally gives you an overview of analyst opinions about a stock. Thus, you can see how many analysts rate it a strong buy, buy, hold, sell, or strong sell. Second, I like to know what thestreet.com's investment team thinks of a stock so I generally research it on there. Third, I use Motley Fool's CAPS system. It has a rating system, and, while I have not so far found it to be of much use, I can see if it agrees with my assessment of a stock or there is a bad rating in that community of stock pickers. Also, if a stock has very little coverage, it may see some good spikes in price as more analysts catch on to the stock and begin rating it a buy or strong buy.

Assuming my fundamental analysis looks good, I have to then look at price.

5. Should I buy this stock at this price now? This may be the toughest part of the decision-making. I really do a few calculations and look at estimates of the stock's price for a year down the road to see if it is currently selling for a fair value or if it is too high. When it seems too cheap, I often go back to my research to see if I missed something in my analysis that would show why the stock is out of favor. (Sometimes, it is just an awesome experience: you research and are convinced; however, the analysts have not yet caught up to the stock for some reason -- that is how I was able to buy EMC for $14.40 and watch it trend back to $13.30 before it moved up to it's current price of $19.60; I've had that same experience with Apple, AMSWA & Tasr -- it seems nuts but sometimes you can get in before the crowd). For me, price is a combination of factors: P/E ratio, PEG ratio, and the expected price in a year (according to various analysts).

What does the P/E ratio tell you? It is a multiple of how high the price of the stock is given the company's current earnings. While it is very important if it is high compared to other companies in the same industry indicating the stock may be overpriced, standing alone, it does not necessarily mean that you are paying too much for a stock. I am not at a point now where I can yet say that a certain type of company generally trades for X PE, although the S&P 500 is supposedly trading for about 18 times earnings at the moment. However, financial stocks and energy stocks tend to trade for less, while technology stocks tend to trade for more. Whenever the P/E looks either too high or too low, though, you need to investigate further.

What does the PEG ratio tell you? This is a much better measure of whether the stock is fairly valued. Wall Street analysts take information from the company to try to estimate what the future earnings will be. If you look at the growth rate of the company and compare it to the PE multiple, you get the PEG. When stocks are growing fast, Wall Street usually pays more for them because they will be worth more in the future (assuming they meet their estimated earnings). So, a high PE does not necessarily mean the stock is overpriced: you have to divide the PE into the expected growth. Thus, if a company trades for 20 times current earnings, but it is expected to grow at 20% a year, its PEG is 1 which is generally a bargain (because as it gets greater earnings, its share price will go up to reflect that). So, I really like to look at the PEG ratio. A PEG of 1 or less is fantastic unless the company has a history of disappointing expectations. A PEG of 1-2 is fine for a company that is really growing. Anything above that is a red flag that the company is overpriced (although there are some exceptions for companies that are experiencing a phenomenal growth surge especially from unprofitability to profitability).

Although ANGO's P/E ratio was high, its expected growth means it deserves to trade at a bit of a higher multiple (27 P/E with something like a 30% rate of growth). Dryships ratio was not so high especially when measured against 2007 expected earnings (19 PE but only 10 PE when compared to estimates of 2007 earnings).

While you are reading about the stock, you may find that it is high or low priced based on other multiples which are important to its industry (for example, multiples of book value or cash flow are measures commonly used in analyzing stocks -- I just store that information as part of my decision-making because it is too variable for just a regular person such as myself. Thus, when I listen to CNBC, I will listen to the different measures analysts use and decide whether those measures are just a way of justifying a too-high multiple or if they make sense to me; I do not, however, use them to decide if the price is good).

On MSN's site, you can find the earnings estimate and the growth rate. Sometimes, I just look at the 2007 FY estimate and multiply by the growth rate and see if the stock is trading higher or lower than that. Then, I look at the 2008 FY estimates and multiply those by the predicted growth rate and see where the stock would be trading by that very simple measure of growth times earnings (as though its PEG would be one by the end of this or next fiscal year). If I have already decided that it is a well-managed company, those are good calculations because it should be able to make those estimates (or beat them). That gives me a rough idea of what the stock might be trading at within a year. Sometimes, I calculate today's PE against future earnings to get the same kind of analysis of where the stock might go.

Often, however, I let the analysts tell me. In my IRA account, I have access to research from S&P & Reuters that give me a predicted price. I can use Morningstar in my regular trading account. And, very simply, CNBC.com gives you Thompson's estimate of the price (within a 12 month window). If you go to the profile section of a stock's page, and scroll down, there's a little box that says the expected price of the stock. That is an awesome tool -- there have been many times where I stock I am reviewing is 20% or more below its expected price or where the expected price has already been reached. That definitely gives me pause. Remember, you want your money to be making money: thus, if the stock is an awesome stock but it has finished its growth for now, you may want to put it on a watch list to see if its earnings go up more than expected, something happens to make the stock more valuable than predicted or it pulls back a little off of its highs.

That said, sometimes, momentum is huge and a stock that is moving up often keeps moving until it gets "overbought," at which point, it might pull back. But sometimes, it just seems to keep flying right on past all the prior predictions for the stock. If you know that the stock has room to grow, and you can be patient, and you want to buy, go for it. You may end up following it down a bit and then, later, it might shoot up or you may get to see it continue up for a while.

Another option is to do some technical analysis: there are simple things that charts can show about whether a stock is done going up or about to trend back up as well as whether or not there is an "overbought/oversold" condition on the stock at the moment. Technical analysis is VERY COMPLEX and, while used to make a lot of money for a lot of traders, is unlikely to be helpful to an individual novice. As you get more sophisticated, there is a lot of great information that you can get from the charts. But, in my admittedly limited experience, fundamentals trump technicals because the fundamentals tell you that you are buying a solid company with good potential: the technicals merely help you to determine that you are buying a good stock. Good companies will eventually have good stocks: good stocks of bad companies will eventually go down!

My examples of ANGO and DRYS are telling: Ango's price target, according to Thompson is $21.92 on expected earnings of $0.12 for the quarter. On the day I did the research, ANGO was selling for 17.99 (thus, it had a potential 20% upside assuming that Thompson was correct and that ANGO met expectations). The problem is that ANGO recently indicated its earnings were going to come in lower than expected. The price target for DRYS was $62.00 and $1.62 in earnings and, on that day, the stock had pulled back a bit and was trading for around $56.00.

6. Time to make a decision: Now you've done your research, what do you think? I watch the stock a while usually before I buy to get an idea of how it trades. I have learned a few things this summer in the stock market that made me realize that everything has a cycle. When I bought my first house, the housing market was "hot" and we were told that we better make a quick offer if we wanted to get the house we found. It was a terrible way to make a decision. While a stock pick is not the same as a house, you really usually don't have to rush in. If a stock gets hot for a while, it'll pull back. It may not pull back to the price you first found it, but most stocks pause or pull back at some point even in the midst of an upward trend. If you are patient, you may get an opportunity to buy in for less tomorrow than today. Of course, you may lose an opportunity completely if a stock makes a mad dash up -- so, you don't want to "overthink yourself out of all stocks." '

What is it you need to decide? Am I getting into this stock at too high a price, just right, or should I go in despite the fact that the price seems a bit high? Now, if you are in for the very long haul, I'm not sure that a few dollars one way or another really matters. When I first started to research stocks, I really didn't even care about price per se because I see that stocks go up and they go down and I might as well get in and let it catch up to itself if it's a bit overpriced or still on its way down. Honestly, I do not think that hurt me except that my portfolio took a while to catch up in a few cases. Like GE -- I heard good things about it, I did much less research then and did not realize that by paying $37.10 per share when a few weeks before it was trading at $34.00 meant I was paying 10% up for a stock that had not grown in years. I wanted in to the stock and I got in -- had I waited, I'd have several more shares at the lower price. But, now with GE between $40 & 41 -- I'm not sure it will ultimately matter. It is a long term hold and it pays a great dividend. However, tying up your money is a lost opportunity. So, I'd rather hold on to a stock that I got at a good price waiting for it to go up, then have bought too high and have to go down and then back up. When my GE stock went back down to its prior $34.00 (which, in fairness to myself, I could not have necessarily predicted), I needed 20% growth to ultimately get 10% growth. So, price matters, but, in 5 years, if GE grows at 20% a year with its dividend, the 37 I paid will not make much difference. (Not that I necessarily expect GE to do that; for some reason, I truly believe in that company but that stock just cannot hang on to any real movement).

If, however, you are planning on trading the stock in a shorter time frame, you must focus on price and try to find a good entry and exit point. This market has been rewarding momentum (although that could change). Thus, stocks that are going up seem to keep going up (although any major upward move in one day seems to usually be followed by a downward move a few days later). So, now, I even play with charts (much more on that later). But I find it very hard to buy a stock that has had a huge move unless it still has room to grow; if it starts to turn around, it may go for a while before it starts to come back up. I like to see a stock that is trending upward but still has room to grow according to my calculations. (For my investment account, I might like a stock in a company where the stock price has been beaten down a bit). But for my trades, I like to look for companies in a clear upward trend so long as they haven't come too far too fast.

Dryships and Angio-Dynamics represent two different ends of that particular spectrum making them both interesting for different reasons. ANGO is a stock that has come down in recent months. Given that markets are supposedly efficient, the market has already beaten down the stock from a high of $31.07 to the current price (July 18th) of $17.99. Does the stock have further to fall? It might if it does not meet earnings estimates. However, it may make a great trade for a few bucks of profit in the next few months. Based on the fact that the news about its troubles (patent litigation and lowered earnings guidance) is already out there, it might already be priced for its bad news. Honestly, I put it into my watch list and I'm waiting to see if it comes down a little more after its next earnings report.

DRYS was a different story -- In my mind, despite its run up in the past year, I still felt it was a bargain at 56. But, I didn't get in at 56 because I waffled that day. I figured I would watch it for another day -- it had just had a great move up, and then it was down a little, so I thought maybe it could come in a drop more. STUPID. The next day it moved up 11%. That's a trade I would have liked to have a part of but missed out of cautiousness. However, in my defense, this is a market that is so volatile, it usually doesn't hurt so much to be cautious. So, now it is in the watchlist because I am going to sit on it for a little bit.

There are a lot of decisions to make when it comes to picking stocks. I hope that this article helps you to find a system that makes you more comfortable with being your own stock-picker. But be careful: the biggest hyped stocks might be ready for a downturn. That's why it is smart to have your own method of making decisions rather than just listening to others. Whatever you do, do not buy a stock immediately after a Cramer recommendation (it jumps up a few percent as a result of the "Cramer effect," but, it usually comes down). And never buy a stock as a result of an e-mail hype.

Retirement Planning Made Easy(ier)

Sun, 14 Jan 2007 10:29:33 -0500

I am a natural born worrier -- I remember being unable to sleep at night because I worried about vampires at the age of 9 or so. In fact, according to everyone who watched me grow up, and everyone who knows me today, I am a serial worrier. I am the mom who hears sirens and calls the kids on the phone to make sure they are okay (even when I know they are someplace safe). I am the one who is constantly fretting over something that needs to be done or is bothering me. My husband says to just let it go, but, it just isn't that simple.

So it is no wonder that I worry about our retirement savings: I check the individual stocks we own in an IRA a bit obsessively; in fact, so much so that we may stop investing in individual stocks and just go with funds -- but then I will probably worry about whether or not we have picked the right funds. In fact, when it came to retirement, I worried so much about what to do that it took me four years to sign up for my retirement account at work: a waste of lots of good stock market returns.

But now, for those of you who may be procrastinating because you cannot make a decision about what to do, Congress has created some new rules that may be helpful. These rules allow employers to make retirement savings automatic. If your company offers retirement plans and adopts the new rules, the company will automatically deduct a certain percent of your pay for your plan. And, if you do not deal with it yourself, the company will also decide where to put that money. This has consequences so, if you have been putting off retirement to the future, get on it now.

First, talk to your employer about retirement offerings. One thing that held me up from investing in my newest job's retirement savings was the paralysis over filling out the forms and setting up the account: I could not make a decision. Basically, my employer gives us a list of places where we can set up an account and has us just do it. Once we have the account in place, we then need to fill out forms to make the payroll deductions into the account. It definitely is not the most efficient way to handle the retirement planning because so many people know so little about retirement savings vehicles that it is difficult to make a choice.

Fortunately, I already had some savings from a former job in a retirement plan at Vanguard. This summer, when I finally figured out it was time to take control over our money (about 20 years late by my calculations), I bit the bullet and got the ball rolling and I am happy to report that I am saving about 6% of my gross pay. I get a raise every year and will be adding to that amount by a portion of my raise until I eventually max out my retirement savings.

Luckily, I had some savings and my husband has been contributing to his 401(k) so we are not so far behind in our retirement planning as we could be. However, I did waste four years of potential growth in my new plan and, because I never dealt with it, I had about 10% of my Vanguard account in a money market account: STUPID. Once I dealt with it all, I actually have seen some amazing returns this year. SMART.

I did a lot of research to figure out where to put all of our retirement money. We had it all of the place, so we consolidated it all to Vanguard because they offer a lot of what we are looking for in an account -- this is a big process though that has taken us months and is still not fully complete.

However, you no longer need to wait to start your retirement account. You just can do it by picking one of the larger fund families and keeping two simple strategies in mind: first, if you are young, just pick a fund that has growth possibilities. The only rules: Pick a no-load fund and go for low expense ratios (under 1%). You can start with two types of funds that are currently offered until you have the time or the inclination to pursue greater strategies: an index fund or a retirement target date fund.

The retirement target date funds offer an excellent option for people who do not want to choose now or ever: they offer a balanced allocation based on your estimated target date, and, later on, if you become more involved and decide to diversify further, you can do so. But they are a great starting point.

Again, however, you need to be a bit proactive by talking to your employer. Even if the company has automatic investing rules, if you do not choose an account, your company chooses one for you. Some are picking the retirement target date funds; if your company is, no problem, move on until you feel like you want to deal with it further. But other employers are putting retirement money into money market accounts. Because stocks are a better long-term value, you should choose at least an index fund if a retirement target fund is not available. (Although a money market is better than nothing, you really do want to put your money into at least an index fund -- it will not be hard to do, I promise -- no load and low expenses, that's it.).

An article in the February 2007 Kiplinger's had a very interesting point about retirement savings: when it is not automatic and employees actually have to do something to sign up for a plan, they are far less likely to do so. However, when they have to do something to get out of a plan, they are equally unlikely to do so. Thus, these automatic enrollment plans will help people to save: and if you save from the beginning of your employment, you won't really miss the money.

Retirement plans have so many advantages that they are simply a no-brainer regardless of your age. In fact, the younger you are, the less you need to save per year to become a millionaire by retirement. According to the Kiplinger's article, a 25 year old who has not saved any money can save $286.00 per month to age 65 and become a millionaire at that time. If the person were to increase that by a fraction every year, they could come out well ahead of that amount by age 65 -- and most of us think that we have no chance to become a millionaire.

It does get harder the older you are when you begin savings. If you have no savings at 35 and want a million by 65, the monthly contribution must be $671.00, at 45, it is $1,698.00 and at 55, it is $5466.00. If you already have savings, those amounts go down considerably. So, starting early and keeping going is the best thing regardless of where you put the money (so long as you are relatively safe and do not keep losing money on the money saved).

Although many people may feel that they just cannot afford retirement contributions along with all their other expenses, just think about the idea of retirement with no money: if you are counting on social security, think twice, you may not get as much as you hoped. If you have a pension, that is great (so long as you do not work for a company that can take the pension plan away as many companies, such as IBM, have recently done). Thus, you cannot afford NOT to save.

Moreover, there is a huge tax incentive to save for retirement. The amount you put into a qualified plan (not a Roth 401(k) although that has other advantages) is taken off of your gross adjusted income. Thus, if you are in a 28% tax bracket, and you invest $5,000 per year, you will save $1400.00 in taxes. So you are really only putting aside $3600.00 out of your pocket for the chance to save $5000.00 -- where else can you get a 28% return on your money? That is why if you increase it every year by a small percentage, you barely notice it. Thus, assuming again a $100.00 increase per month next year so that you are saving $6200.00 per year, instead of $5,000.00 as you might be this year, you will see a reduction in a weekly paycheck of $18.00, $36.00 for a twice a month paycheck and $72.00 for a monthly paycheck -- yet you are saving an additional $100.00 per month toward retirement.

If someone said to you, "hey, if you give me $72.00, I will give you $100.00," wouldn't you do it? This is exactly the same thing. And for some of you lucky folks, your employers might match a portion of your savings: that $72.00 out of your pocket might really be $172.00 that you get -- that's an amazing rate of return of about 238%. I'd love to make that on all my investments.

If you increase your amount by half of your raise yearly, you will still see about three quarters of the raise anyway -- so, you might as well do it when you get a raise, then you really won't miss the money.

As if all of this is not incentive enough to save money for retirement, I have one other thought for you: picture yourself a millionaire and never having to go to work again (although I am well aware that a million dollars may not allow you to stop working by the time you are 65). It sounds like a pitch for one of those get-rich quick schemes, doesn't it? But this is legitimate: it is getting rich slowly. As Nike says, JUST DO IT!

Taking Control Over College Savings: The 411 on 529's

Sat, 23 Dec 2006 12:56:48 -0500

Taking control over your money is a complicated task especially when the "discretionary" money is not a lot to distribute. However, regardless of how much you have, if you have pre-college age or even already college age children, now is a good time to look into saving for college in a 529 plan.

What is a 529 Plan?

Named after the provision of the IRS code that deals with taxes on the income from such plans, 529 plans allow you to invest after-tax dollars to pay for qualified educational expenses for whatever beneficiary you designate. Such expenses range from tuition, room and board, fees, books, etc. The money from the account grows tax-free until you are ready to use it.

Why are they a benefit?

First of all, the money you invest in such plans grows tax-free as long as it is used for qualified educational expenses. So, if your children are young, and you are investing for a while, you can get significant gains in the accounts without paying any taxes on those gains. That did not entice so many people in the past because the favored tax status was set to expire in 2010. Now, however, that tax status is permanent. Therefore, if you invest money and it grows, you will get to withdraw that money without paying any taxes on the earnings. In and of itself, that is a fairly significant benefit because the same money in a regular account would be taxed at anywhere from 15% for the capital gains and dividends to your own income tax rate, if, for some reason, it is not in a favored tax account.

Secondly, for those of you who may be eligible for financial aid, such accounts are considered the property of the account holder and not the beneficiary. Other vehicles used for college savings, such as the Uniform Gift to Minors Act accounts, are considered assets of the minor whose name they are under. When you apply for financial aid, only 5% of the parents' assets are considered as eligible for college payments, whereas 35% of the student's assets are considered eligible. Thus, if you had $100,000.00 saved in your child's name, federal financial aid formulas would consider $35,000.00 of it as available to pay college expenses; if that same money is in a 529 account, only $5,000 of it will be eligible for college expenses under current aid formulas.

Third, you may get a state tax write-off for investing in 529 accounts either directly through your home-state's accounts or, at least in Pennsylvania, if you invest in an account even through other states. Not all states offer the tax break and some have limits on the amount that can be deducted. If, however, your state offers the tax break, then, there is no reason not to contribute to a 529 account even if all you do is park the money there until you have to spend it on the college expenses. That is why the accounts are useful even if your children are already of college age.

For example, let's say I set up an account, in New York, for my 19 year old son who is already in college. I can get a New York deduction for all amounts I contribute up to $10,000.00 (if married, $5,000 if single). Even if I contribute the full amount, I can take it right out to pay for qualified expenses and still get the tax write off.

Moreover, the accounts have fairly generous allowances for total contributions. Thus, the maximum amount that can be contributed in New York is $235,000.00. That means that you can invest $235,000.00 in tax-free accounts that you can use for qualified educational expenses. If you have small children you may not believe me; however, college costs are extraordinary -- they can easily exceed $100,000.00 per child especially in private schools. And if one child does not use the whole amount, it can be transferred to another person in the same family.

What is the downside?

The most dangerous part of such plans is the same as with any investment: your investment is not insured and you could lose it if there is a downturn in the investment vehicle you choose. In addition, if your state does not have a good plan, you might also have very high expenses especially for managed plans. In New York, the expense ratio of a direct plan is .055% of the assets which is more than I pay for my retirement funds, but still somewhat reasonable. However, plans sold through brokers and financial advisors, rather than bought directly through your state, can have much higher expense ratios.

Some people also do not like the options offered in such plans for investment. New York's plan has basic options that allow you to be more or less conservative in your investment choices or let you automatically invest depending on the age of the child. Each plan is different in terms of expense ratios and options for investment.

The last downside is that you may pay a penalty if you do not use the money for qualified educational expenses. Thus, if you take the money out of the account and you do not have tuition bills or other costs that equal what you took out, you will pay a 10% penalty on the earnings as well as the back taxes. You will also have to pay back your state for any deductions you have. Thus, you should only invest in such plans if some or all of your children are going to college.

How do you find the right plan?

First, check your own state. If your state offers a plan, it will explain the tax implications of its plan as well as whether or not there is a benefit to owning your own state's plan. It will also explain the expenses. If your state does not give you a tax write off, you can compare plans; however, several articles I have read on the subject indicate that Utah has the best plans: I have not researched Utah's plan specifically because my state, New York, has a good plan with a tax deduction for state taxes.

If your state gives you the write off, go for it right away. Be sure to check the following: the maximum contribution allowed per beneficiary, the maximum tax deduction, the investment choices, and the expense ratio. This could be just the motivation you need to begin saving for your children's future.

It may also make sense to cash in any bonds you have for your kids and put the money into this plan instead -- look into the numbers, you may find that you will earn more in this kind of plan and you will not pay taxes.

Finally, even if it is only a small amount every week, the sooner you save for college, the better off you will be -- my husband and I have learned that the hard way -- with not a lot for college, we are borrowing to fund a good deal of my son's college; we will have to pay off that debt before we can even think about retiring. If we had socked away some of the money we blew, we could have it much easier now. But, no guilt: better late than never and my new knowledge is allowing me to save some money on my state taxes this year. Hooray for me.

It Makes a Great Gift Too:

If Grandma and Grandpa want, they can also set up 529 plans for their grandchildren. They might get a tax break and help pay for college. And if they don't want to set up their own plans, and they do give a gift of money, you can add that to the 529 plan and let it grow tax free. And if you are a grandma or grandpa, you can give your own grandchildren the gift of college with these sorts of accounts. (Just make sure you give them a little something to open too).

Taking Control Over the Corporate Management Crowd

Sun, 29 Oct 2006 13:34:40 -0500

If You Invest, You Need To Know How Much Corporate Management Earns, but It is Nearly Impossible. So, What Can We Do? At The Least, Let Us Get Knowledge and Get Angry. Then, Perhaps, We Can Figure Out How To Take Action

If you are an investor in individual stocks or mutual funds that hold stocks, than you have something you need to start to think about. How can you protect your interest, small as it may be compared to all the shares outstanding, when it comes to the issue of executive pay? My short answer is you cannot. However, as an investor, you probably should know that there are a number of important issues going on that involve your investments and how management treats those investments. So this article is designed to give investors (both direct shareholders and mutual fund investors) some important information about how top management of many large publicly traded companies are both overly compensated as well as defrauding investors.

Right now, you have a chance to have something down about it in the form of shareholder derivative suits permitted by Section 10(b) of the Securities Exchange Act of 1934. You can also complain to your state attorney general if you are an investor who believes that companies in which you invest are doing something wrong. However, if the federal government takes the action they are now contemplating, those rights may be forever lost and then you really will not be able to hold companies in which you have invested responsible to you.

The Story:

Last week was a good week for investors with the Dow surpassing 12,000. But, it was also a good week for investors on another front: corporate accountability. The New York State Attorney General, Elliot Spitzer, won his case (for now) against Richard Grasso, the CEO of the NYSE, a publicly traded company. The Court decided that Grasso breached his fiduciary duty by failing to fully disclose his pension and other aspects of his compensation to the Board of Directors of NYSE. What this will mean to the future of outrageous compensation packages remains unclear, especially in light of the increasing allegations of stock-options backdating to increase executive compensation.

While Grasso was found liable by a Court, another Court sentenced Jeff Skilling, Enron's CEO to 24 years in prison for his role in the Enron fraud. Meanwhile, William McGuire was forced out of United Health and the Wall Street Journal and Merrill Lynch are both investigating options' backdating to see how such acts might affect shareholders. So, as of now, while it may take a while and cost a lot of us a lot of money, there are some people out there overseeing fraud and excess by some corporate executives.

Why Should We Care?

If someone walked into your house and stole something, you would call the police. If you invest in stocks and the executives and/or Board of Directors engage in theft, we should be equally outraged. It is, after all, our hard-earned money they are stealing. Not only our money that we earned, but money that we expect to be there when we need it. Of course, investments are not guaranteed, especially stock investments. But, excessive corporate pay or forms of corporate/accounting fraud that cause us to underestimate our risk of investing is not the same as just making a bad investment.

For the stock market as a whole, but for ourselves in particular, tolerating corporate irresponsibility and fraud is unacceptable. Essentially, when we buy stock, we buy "ownership" in the company. Just like I would not "loan" money to my cousin who is not trustworthy, I would not buy stock in a company that is run by untrustworthy people. If executive pay issues rich all over the market, I will have trouble trusting any of the people running the corporations with my money. Theoretically, that means that all of us investors would have to remove our money from the stock market -- which seems extreme.

Thus, as investors, we need to be assured that we are not letting people steal from us. Why is some executive compensation the equivalent of theft? Grasso's 100 million dollar pension is a hundred million dollars more that can be divvied up amongst shareholders or used to build up the company.

Every executive who has one of these exorbitant packages is taking money from shareholders. While everyone deserves compensation for their work, and, I am sure that the CEO of a huge corporation works hard, executive pay is truly out of control. (100,000,000 dollars is equal to almost $275,000.00 per day or $11,500.00 per hour assuming a 24 hour work day -- their earnings in one hour are more than some people make for a year (believe it or not, minimum wage for 40 hours per week comes to approximately $15,000 per year, so, I am not really exaggerating).

But why should an attorney general of a state go after outrageous corporate pay? Is that an issue for state or federal government to solve or should Boards of Directors and stockholders take care of their own corporate pay issues. I presume that some might argue that the shareholders are not forced to own shares in a particular company; thus, if they do not like executive pay at a company, they need not own shares of that company.

However, it is not that simple for a shareholder to determine what amount of executive pay a group of individuals gets especially when compensation formulas are as complicated as they often are. Others could argue that the high earnings are well-earned, and they might be. However, such excessive pay definitely cuts into the bottom line of corporate profits.

Some of the people who earn this exorbitant pay are the same people who suggest downsizing companies to save money by firing the regular hourly workers. (Based on my calculations, you would have to fire hundreds of average employees to recoup the amount that some of these CEOs make). Many of these same people argue against increasing the minimum wage to a livable standard.

What kills me is that the argument that some poor working class person should not get an increase of $40.00 a week is a huge issue for the government, but the government might shrug off a compensation package for one person of millions of times that amount. It just feels like bizarro world to me.

The bottom line is that corporate oversight is the only way the individual has to protect him or herself. If the government does not get involved, nobody will: an article in the New York Times several weeks ago showed that institutional investors, mutual fund managers, who have the biggest voice in shareholder voting, tend to side with management on the issue of executive compensation. Thus, those people with the biggest voice at shareholder meetings, the mutual fund managers, actually go along with the management's requests for high compensation. They do not do because such compensation is in the best interest of the shareholders. So why do they vote for such high compensation packages? Because those mutual fund companies are also making money by administering corporate 401(k) plans: if they vote against management on corporate pay, they may lose the account.

Truly, all these people are in bed with one another. They have no choice but to share the covers.

If the mutual fund managers are not voting against excessive pay, how can individual shareholders really do anything about it? Recently, it became clear that many companies have begun backdating option benefits to give management even bigger pay. Once that is sorted out, companies may have to restate earnings; thus, shareholders cannot even know what the pay of an executive actually is at the time of buying the shares and, perhaps even worse, individual shareholders who base their decisions on earnings as stated, cannot know the true earnings of the corporate shares which they buy. For that matter, neither can the big institutional investors who we entrust to buy the proper shares. We have no choice but to trust them because that is the way most of our retirement funds are being held: in mutual funds of some type.

It is a real conundrum: we want to make money. The stock market has been the best way to do so over the past 70 or so years. The laws are supposed to protect us: after all, the CEO's and Boards of Directors have a fiduciary duty to their shareholders which means that their decisions have to be in the best interest of the shareholders. Thus, if they have to accept lower compensation to do what is right by their shareholders, they should do so. Otherwise, they should face sanctions either by shareholder suits or by the government. Both types of cases have recently shown that corporate executives and boards better look more closely at management compensation packages.

I have been thinking about this a lot lately because I have been paying a lot more attention to my family's finances, I am writing this web site, and, therefore, I listen to and read a lot more about business than I used to. In fact, my husband and I have been investigating our own holdings for the purpose of figuring out the best way to invest for our retirement, and, as I will discuss in a future article, got some disturbing news: my husband's plan manager is offering mutual funds with sales loads and all kinds of fees and expenses and the firm hired to administer the plan is making a lot of money off the backs of all of us who are investing our nickels and dimes for retirement. If that firm is going to make a lot of money, it ought to be offering good choices, and, while researching, we found out it offers all the kinds of choices the personal finance advisors advise against. It is all hugely frustrating to work so hard to make less than some of these people make in a day only to find that people that are supposed to act in your own interest do not do so. How do you get ahead in a system that is not designed for the average individual.

What is Secretary Paulson thinking?

I have been thinking a lot about these issues and then today, I learned even more disturbing news. If I am correct, as a small investor, relatively speaking, my best hope is that if someone does something wrong, I can turn to a shareholder suit (with lots of other shareholder's) or can contact my state Attorney General who can investigate and, if something nefarious has occurred, take action.

Today, I learned, however, that Treasury Secretary Henry Paulson, Jr. is attempting to do away with all that. In the New York Times Business Section, Ben Stein is taking corporate America to task for trying to get the government to prevent shareholder and attorney general suits. Or, perhaps, he is taking the government to task for allowing corporate shills to convince American politicians that they ought to rewrite laws to prevent such suits from going forward.

This seems so wrong to me: in the midst of feeling badly used by someone whose job it was to help us make good investment decisions, I read about the absolute lack of limits in corporate greed, and I am angry. I am angry that I have no power beyond my vote to take care of my own money. I am angry that the government feels a huge need to take a huge chunk out of my family's paychecks, and, as we earn more money, the hard, old-fashioned way, by working harder and harder, the government cannot be bothered to understand that we are still middle class and "forgets" to fix things like alternative minimum taxes for average people, or pay increases for working class people, but, can spend time and energy fixing the securities' laws to make it easier for corporate America to commit fraud and take excessive pay.

I know that all of that money buys corporate America a ton of access that I cannot afford to pay for-- I am a social studies teacher, after all, and I teach about lobbying and political campaign finance. So, I actually know more than most about how such money controls the political agenda, yet, I also teach about the early days of the Republic, and, naively, I sometimes believe that the government is supposed to be about protecting me and the people like me -- the backbone of American society. So, while I do not mean this article or web site to be expressly political -- most people reading this site are interested in learning how to better their own financial positions, not about politics -- I find I need to take a stand to educate the (admittedly small) numbers of people who read this site.

So, according to Ben Stein, in Has Corporate America No Shame? Or Memory? (New York Times, Sunday, October 29th, 2006, Sec. 3, p. 3), Henry Paulson, our Treasury Secretary and former "top dog" at Goldman Sachs, has created a "Committee on Capital Markets Regulation" to study "whether securities regulation and litigation that ...protect shareholders are harming American 'competitiveness.'" It seems that the purpose of the committee, which includes distinguished academics as well as heads of financial firms, manufacturers, and accounting firms is to ensure that regulatory laws like 10b are not hurting American corporations' competitiveness.

Stein points out that this committee exists at a time of "major corporate frauds: backdating of stock options, which is really just insider trading in a big, big way; undisclosed executive pay and "gross ups" for paying taxes; stupendous looting in the form of "going private" transactions where management buys assets from stockholders at below-market prices and becomes rich in the process; and many others. And there are straight-out accounting frauds in which major players actually go to the Graybar Hotel along with people who did their thieving with guns instead of computers."

The "laws" existing today are getting in the way of all of this wealth generation; therefore, the committee is working to convince the lawmakers that these laws need to be changed. So, the attorney general who I applauded in the beginning of this article only last week, would be shut down (actually, he'll probably be the next governor of New York, but the other ones out there who are attempting to help the people in their states) will be shut down.

As Stein notes, what a waste of management talents: what if they actually went to work thinking about how to best serve the shareholders instead of spending their energy in such a self-serving enterprise. What if they actually had to remain accountable to the shareholders? He analogizes the committee's ideas to an argument that hospitals would be more competitive "if [they] didn't have to take care not to kill [their] patients when [they] operate on them."

It really is bizarro world! What absurdity. And shame on those professors who are actually helping this committee gain credibility. I've worked with academics. Many of them are good, smart people. But they are like corporate executives sometimes: they are out of touch with the real lives of real people. They are out of touch with the lives of the people who buy their products and their stock and keep them in business. HOW DARE THEY speak for us!

If you do not like to think about these issues, that is fine. However, it's your dollar: it is your tax dollars that pay Secretary Paulson's salary and presumably the work of this committee. If you are in mutual funds or stocks, it is your dollars that OWN the company. If the management need not be accountable to you to be competitive, than who prevents the management from doing what is best for itself even if not in the best interests of the owners.

It makes me think: I work for a school. I am accountable to the students, the taxpayers in the community, the parents, my boss, the principle, a superintendent, and so on and on and on. If I make a mistake, I have to live up to it. If I steal money from my students or the taxpayers, I will be fired. Simple. My husband works for people who own his nursing home. He runs the place; however, if he does not listen to them, they can fire him. He does not get to choose his own pay, they choose it. Like other managers, he has a say in recommending pay; however, his bosses pay attention to his pay package which is straightforward and easy to understand. If it were not, they would not pay him.

Honestly, I don't want to pay corporate executives who do not tell me exactly what they earn and why they deserve to earn so much. It's absurd to do otherwise. It would be absurd for the owners of my husband's nursing home to say take whatever you feel like. In fact, we'll hire a company to figure out a creative way to pay you so you can pay less in taxes and make it look like you do not earn as much as you earn. Regardless of how much money these executives help the companies make, they surely have to be fundamentally accountable!

Those are the laws the government should worry about: I own these companies that I have invested in. If they are not worried about satisfying me, and there is no way for me to know that because of how they do business, and they are so important to the economy, the government should make sure that they act properly; the government should not help them to rip us off. Somehow, we need to remind these major corporations of who pays their salaries. Honestly, if every shareholder moved their money into cash, the stock value would go down, and, then, they'd have to sweet talk us. But, there is no way for all the investors to wield that power because of our diversity -- we are everyone, not the big guys. In an era where there are fewer pensions and less money funding social security, the government better make sure that shareholder retirement accounts are safe. If they do not, the taxpayers will have to take care of us in old age.

So, where should our Treasury Secretary put his attention? Toward making sure that corporate executives make more money? or that the majority of us who do not make those millions can afford retirement? I think he should focus on us. And, if he does not want to, then, well, it is a republic, and when the powers that be do not do the things we want them to do, than we should vote them out. So, we should stay informed as to how the government does or does not take care of us; if it fails to, we need a new government.

And if you invest your money, keep an eye on the news about all of your investments. Remember, you are the only one who can protect you.