Largest Market Crash following US election in History!

Buyers ran for the exits as declines lead advances 4 to 1.  It was the largest percentage drop following a presidential election in 112 years of data (shown below) according to Reuters.com.  In fact, we have to go all the way back to 1932, during the depression, to find numbers anywhere close to today's blowout.  

The US is having a fire sale on its corporations, yet a ton of foreign money sits on the sidelines.  The magnitude of today’s market direction speaks volumes about the lack of confidence the global business community now has in this country. 

Year   Dow    S&P    Nasdaq  President elect

2008  -5.05  -5.27   -5.53   Barack Hussein Obama

2004  +1.01  +1.12   +0.98   George W. Bush

2000  -0.41  -1.58   -5.39   No decision: G.W. Bush v Al Gore*

1996  +1.59  +1.46   +1.34   William Clinton

1992  -0.91  -0.67   +0.16   William Clinton

1988  -0.43  -0.66   -0.29   George H. W. Bush

1984  -0.88  -0.73   -0.32   Ronald Reagan

1980  +1.70  +1.77   +1.49   Ronald Reagan

1976  -0.99  -1.14   -1.12   James Carter

1972  -0.11  -0.55   -0.39   Richard Nixon

1968  +0.34  +0.16    ---    Richard Nixon

1964  -0.19  -0.05    ---    Lyndon Johnson

1960  +0.77  +0.44    ---    John Kennedy

1956  -0.85  -1.03    ---    Dwight Eisenhower

1952  +0.40  +0.28    ---    Dwight Eisenhower

1948  -3.85  -4.15    ---    Harry Truman

1944  -0.27   0.00    ---    Franklin Roosevelt

1940  -2.39  -3.14    ---    Franklin Roosevelt

1936  +2.26  +1.40    ---    Franklin Roosevelt

1932  -4.51  -2.67    ---    Franklin Roosevelt

1928  +1.20  +1.77    ---    Herbert Hoover

1924  +1.17   ---     ---    Calvin Coolidge

1920  -0.57   ---     ---    Warren Harding

1916  -0.35   ---     ---    Woodrow Wilson

1912  +1.83   ---     ---    Woodrow Wilson

1908  +2.38   ---     ---    William Taft

1904  +1.30   ---     ---    Theodore Roosevelt

1900  +3.33   ---     ---    William McKinley

1896  +4.54   ---     ---    William McKinley

* George W. Bush ultimately was determined the winner of the

2000 election.

Source: Reuters EcoWin

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Evaluating Risk and Reward

We all take risks, especially when investing our hard earned money. And, most of us have heard that risk and return are closely linked. Risk is an important factor in asset selection, because if you select an investment that is more volatile or goes down more than you can handle, you may be tempted to make irrational choices at the wrong time – such is typical of the “sell low and buy high” crowd.

As I approach the brink of financial independence, I want to reduce my risk. I won’t need to take so many chances anymore. I will have enough. Of course, I do not want to eliminate all risk as I believe some is necessary to continue to grow, slow and steady. So, how does one go about assessing risk?

It’s easy to calculate the returns on investments, but evaluating the risk is much more nebulous. Everyone has a different definition of risk and how to quantify it. One approach that I have used in the past applies the statistical measure called standard deviation.

Standard Deviation can be calculated based on returns over several years and provides insight into how often an investment's return is different than its mean return and by how much.

How much return does risk-taking buy you? To help answer that question, I created the following table with data that was pulled from this Matt Krantz article in USA TODAY. The analysis begins with the average annual compound returns and standard deviation for several asset classes over a bunch of years. The return data was derived from the market research firm Global Financial Data.

From there, I calculated the 68% confidence intervals for one standard deviation. For normally distributed data, 68% of the values will be within one standard deviation of the mean, while 90% will be within 1.645 deviations of the mean. So, it is very likely that the return for an investment will fall within the minimum and maximum values provided in the table. I then determined the return to risk ratio for each investment type.

The return/risk ratio is the amount of percentage points of return that can be expected for every percentage point of risk. In other words, how much risk is involved in achieving the return. Volatile investments, with average or poor returns, such as oil and emerging markets, have low ratios.

With a little bit of study, the table can provide some valuable information. For instance, you may notice that value-priced stocks have beaten the S&P 500 and are considerably less risky. In fact, its even money for value stocks. Surprisingly, corporate bonds have an excellent ratio providing good returns for low volatility, while municipal bonds do not appear to pay out enough to compensate for the downside risk.

Housing is another interesting asset class that has an extremely low return to risk ratio. It averages 3.5% return, but it has significant volatility. This is one of those asset classes that is difficult to make a broad assessment because property values vary considerably with location. While I have seen steady appreciation in my neighborhood, others have seen sky-rocketing home values and now plunging prices. Another thing to keep in mind when looking at this data is that some of these assets, like gold and housing, have not historically been considered investments.

One other item of note is the years column. This indicates how far the data series goes back – the more years, means more data and more reliable numbers. Gold is the only asset class with data for more than 200 years.

What other information can you glean from this data? Were you surprised by the return to risk ratios associated with certain asset classes?

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The fine print on Stock Options

Stock options are a wonderful thing, but they come with a lot of rules requiring careful management. Here are some of the general rules to keep in mind if you have stock options:

An Option may not be exercised until it has vested. Vesting is all about the rights of ownership. You have no right to the option until it is vested, even though it can still be working for you, appreciating in price, in the market. Typically, stock options will come with a vesting schedule, such as the one below. In this case, one third of the shares will be vested at the first vesting date, then another third at the second date and so on.

First Vesting Date: January 29, 2005 - One-Third
Second Vesting Date: January 29, 2006 - One-Third
Third Vesting Date: January 29, 2007 - One-Third

Some of the caveats for vesting:
* If you die or become disabled, all unvested Options will immediately vest.

* If you resign or otherwise terminate employment, whether voluntarily or not, unvested Options will be forfeited upon your termination. While Vested Options will expire at the end of their remaining term or 30 calendar days following your resignation or termination, whichever is shorter.

If you have early retirement plans, be sure to keep this last warning in mind. You have 30 days after termination to exercise your vested options or lose them!

Once an option is vested, you have the right to exercise it. Exercising a stock option means buying the stock at the price set by the option (grant price), regardless of the stock's price at the time you exercise the option. You must pay the stock option cost (grant price) to your employer and in turn you receive the shares in your brokerage account.

More caveats:
* Options must be exercised within ten years of the grant date.

* Once the option has been exercised, you can sell the stock or hold it as long as you like.

When you sell shares which were received through a stock option transaction you must pay ordinary income tax on the difference between the grant price and the exercise price. In addition, if you hold the shares and they appreciate, you must pay capital gains tax on the difference between the exercise price and the final sales price.

It is possible to reduce this tax bill by holding the stock options at least one year. For instance, if you had waited to sell the stock for more than one year after the stock options were exercised and two years after the grant date, you would pay capital gains, rather than ordinary income, on the difference between grant price and the sale price.

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How much Employee Stock is too much?

I work for a large corporation and through my 401(k) I have invested in the company stock. The company has also given me stock as a match to my contributions and I have been fortunate to receive stock options. All of this means, I have a lot of shares in "big mama" corporation.

In fact, my company stock as a percentage of my total portfolio continues to increase steadily. Over the last 6 months, it has grown to 15% of my total holdings. The growth is not so much from the stock appreciating as it is from my other assets shrinking in value!

According to most financial advisors 15% is way too much invested in a single stock, and way too much invested in my own employer. Most financial planners advise that no more than 5% or your retirement portfolio be concentrated in your company stock.

Gee, my company stock has actually been one of the few bright spots in this market. It has held it’s own throughout this credit crunch ordeal, while nearly all other assets have plunged 10 to 20%.

From the beginning I have always rationalized that my employer’s stock is different, it’s a defensive stock, somewhat of a hedge against the market. To this day, that reasoning seems to have been right on target.

However, I have this eerie feeling and can’t help but wonder if Bear Stearn’s employees made similar assumptions. Thinking that Bear was just too big and too important to the US economy to ever fail. Of course, Bear wasn’t allowed to fail, but with the revised rescue plan, the value of the company stock owned by Bear employees is now worth a tenth of what it was just three months ago.

Can you imagine that? Your 401(k) dropping in value from say $200,000 to $20,000 in less than 90 days? Whether you are young or about to retire that has got to sting. Have we not yet learned our lesson from Enron and others about the pitfalls of owning too many company shares?

This NY Times article provides some interesting stats about company stock plans.

In 2001, when Enron filed for bankruptcy, investors in 401(k) plans that offered company stock held 28 percent of their retirement account in employer shares, on average, according to Hewitt Associates, the employee benefit research firm. By the end of last year, that figure had dropped to 16 percent.

That’s a big step in the right direction, but it’s interesting that the article also points out that some 401(k) participants are still making huge bets on company stock.

At the end of last year, nearly two of every five 401(k) participants were putting 20 percent or more of their money into employer stock, according to Hewitt. And about one-sixth of participants were investing half or more of their nest eggs in it.

It seems that familiarity with one’s company stock is a big factor. It’s probably comforting to many employees to buy stock in what they know best – their own employer. Isn't that what the luminaries of investing such as Peter Lynch and Warren Buffet have been telling us all along - invest in what you know?

I am willing to risk a little more than 5% in my company stock and a little less than 15%. My goal is to get the allocation back around 10% and maintain that for the long run.

For more personal finance information check out the Money Hacks Carnival #6. My article, "The Real Cost of Outsourcing Tasks" was included.

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First visit to Broker pays off with Everlasting Impression

Quite a few years ago, while in college, I took an engineering management course. One of the first projects assigned was to select a stock portfolio and follow it daily. This sounded great to me; I was eager to get involved in the stock market. We were expected to chart the results, calculate the return on investment and at the end of the year be prepared to discuss the performance of the stocks. Of course, we were doing this experiment with pretend money.

This was back before the days of the wonderful internet and so to chart the daily moves of a stock, it meant that I would need to subscribe to a newspaper or visit the library everyday. I was too frugal and broke to sign up to a paper and the library idea was way to time inefficient. Fortunately, another much wealthier student in the class subscribed to the Wall Street Journal. He stacked them in a massive pile in a corner of his dorm room for months and then one day at the end of the semester he waded through each of them to get his prices. He then loaned all the papers to me!

Anyway, to get help with the assignment, another student and I decided to visit a nearby brokerage firm. We had already decided that we wanted to research some engineering companies, but we needed to know what the transaction fees were for buying and selling securities. Now, remember this is also before discount brokers. Trading was expensive!

The broker was very receptive, even though we told him we only had play money. He showed us all around the office and pointed out that they had a direct link on a computer to a stock ticker! That was so impressive watching the ticker symbols roll by. I felt the energy; it was like we were right in the middle of the action. I thought it was amazingly cool to see other paying clients come in, sit down at the computer and check out their stocks. “Someday that will be me”, I said to myself.

The broker gave us his schedule of fees. And when he heard our story and realized that we were only 20 years old, the only thing he could talk about was how great it was that we were starting investing so early. He went on and on about how getting in early was so important. He rattled off rates of return over the last 20, 30 and 40 years and something about compounding interest.

He was so caught up in getting started early that we didn’t get to talk much about how to research and select stocks! All of his talking and enthusiasm left a very deep impression with me. I was about to graduate with a decent engineering job and would have more money than I needed for basic expenses. I made a note to myself to invest that extra cash as soon as possible.

Would you believe that I never stepped foot into another brokerage firm after that day!? After landing a job, I subscribed to a financial magazine that had advertisements for mutual fund companies. That was the first I had heard about a company named Vanguard. I liked everything I read - low fees, no frills and solid performance. I mailed in my first investment to the S&P 500 fund, VFINX. That was the start of many more investments with Vanguard.

Why didn’t I buy stocks? Very simply - the fees. I couldn’t get over the high brokerage fees! Eventually, a few years later, discount brokers came on to the scene and I promptly signed up to buy individual stocks at more reasonable costs.

Even though I didn’t buy stocks right away, I have to give credit and thanks to that broker for being so persuasive and adamant about investing early because that has proven to be a key to achieving financial independence.

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Gold's Green Light is flashing a buy signal

Ah, Don’t you love mechanical buy signals? Could it be true? Is there a proven indicator, a green light, that tells us when it’s time to buy?

For the past 25 years the XAU/Gold ratio has been right on the money. Buying gold shares anytime the XAU/Gold ratio has fallen below 0.20 over the past 25 years has been a slam-dunk. And that trend is continuing even today as we speak. Anyone buying gold at the previous dip below the 0.20 mark which would have been Feb 5th is now enjoying a gain of 3.77% in 10 trading days.

For those that are new to this modern day gold rush, the XAU is an index of gold mining stocks. And as most gold traders will tell you, gold stocks typically lead the bullion. However, in the last few weeks the opposite has been happening. Gold shares have lagged the metal sending this XAU/Gold ratio down to a low of 0.1945. This doesn’t occur very often and to illustrate that point I have plotted the XAU as a ratio to GLD, which is a gold ETF. GLD is one of the easiest ways to own gold bullion in the market. Because it trades at 1/10 the price of spot gold, I have multiplied GLD times 10 to preserve the ratio.

As you can see, the ratio has dipped below 0.20 three times in the last 4 years that GLD has been available for trade. Twice in May of 2005 and then again in August of 2007 and each time the gold bullion (gold line on chart) takes off for a nice gain. You may have also noticed that the ratio has dipped again in the last few days!

What is most interesting is that GLD has had a huge run-up in the last few months and yet the indicator is signalling a buy. Since Aug 2007 it has gained over 40%. Is there room for more growth? Many think so and the market certainly wants gold to hit $1000/ounce.

With the large gains over the last few years, I am a little leery about adding anymore to my current GLD position. I also cringe at the tax implications of GLD. Long term gains for gold is taxed at 28%.

After a little research, I now know that gold is actually a better deal if you plan to make a short term trade! The taxes on gold gains held less than one year are at your income tax rate. It’s not a big break, but it is something to think about.

Why is the ratio low? The value of gold stocks is heavily weighted to the price of gold bullion. But with the large gains in bullion and weak overall stock market, the stocks have not been keeping up. Gold bullion has been pummeling every sector of the market, even the gold mining stocks.

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Behavioral Finance – Social Proof

Can you stick to your financial plan when everyone else claims the sky is falling? This is the seventh in a series of posts about common human misjudgments. The series is based on a Charlie Munger speech at the Harvard Law School in 1995.

Why study human behavior in relation to finances?
Recognizing and understanding why people do the things they do, what drives them, and what are innately human tendencies is the first step in overcoming your own self and making sound decisions! We want to make rational, logical decisions, but emotions and irrational tendencies get in the way.

7. Bias from over-influence by Social Proof
Social proof involves doing something or not doing something based on what everybody else is doing. It's also commonly known as going along with the crowd.

Charlie gives a couple of examples. One is the case of a young woman, Kitty Genovese, who was slowly murdered while more than 38 people did nothing to stop it. There were lots of excuses. Maybe the most apathetic was the one who told reporters, “I was tired.” But the fact remained that dozens of people stood by and watched a woman being brutally assaulted for an extended period of time, and did nothing. One of the explanations given is that everybody looked at everybody else and nobody else was doing anything. And so there was automatic social proof that the right thing to do was nothing.

Another example he cites is the run on fertilizer companies by Big Oil. Several years ago one of the large oil companies bought a fertilizer company and then practically every other major oil company ran out and bought a fertilizer company. There was no reason for all these oil companies to buy fertilizer, yet they did what their peers were doing. If Exxon was buying fertilizer then it was good enough for Mobil and so on. It turned out to be a financial disaster for the oil companies.

A more recent example would be the way US financial institutions followed each other into creating the current mortgage crisis. Only one of the major players, Goldman Sachs, managed to steer clear of the stupidity.

And of course, social proof, seems to be the mantra of Wall Street. The street reacts with a herd mentality concerning any and all financial related news. It’s an all out stampede with everyone trying to not be the last one to buy or sell. It takes a ton of courage and patience to hold your ground and stick with your financial plan when everyone else is screaming sell, sell, sell!

Especially in times like these when the talk of doom and gloom is ubiquitous. The pundits continue to argue that this time is different. This downturn is unlike all the other bear markets that we have been through. They say that back then whenever there was a stock market crash or a dip in housing prices, each of those markets were able to snap back rather quickly. But this time they say, it’s not just the market, it’s the whole economy.

The financial institutions are shaken and scared. Their only hope is to instill fear in the consumer in an effort to convince the government to come to their rescue. They have taken a huge gamble and lost and now the rest of the world is swooping in to buy up America at rock bottom prices.

In the end, these new owners will still be willing to give you a loan, but now instead of the US financial sector draining billions out of society (John Bogle refers to it as subtracting value from the economy), it will now go into the pockets of hedge fund managers, mutual fund managers, and bankers, etc. in another country.


For more on personal finance, check out the Carnival of Debt Reduction hosted by My Dollar Plan. My article: My beloved Supra has become a money pit was included in the carnival.

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Rate cuts will widen the Gap

This recent NY Times article on the effects of the interest rate cut left me thinking that it will simply widen the divide between those with good credit/secure jobs and those that are struggling.

• The rate cuts will indirectly result in lower mortgage rates and those with good credit can refinance, but those without credit can forget it.


• Credit card rates should also drop, benefiting most everyone, but the savings on interest payments is expected to be insignificant for the average card holder at less than 15 bucks a month.


• Rates on car loans will drop and once again borrowers with good credit will benefit.

Basically, those with good credit that can afford to spend money, will now get a better deal for their buck.

In addition to widening the gap between the haves and the have-nots another big downside to the rate cut is that savings account interest rates, money market and CD rates will all fall. This will negatively affect retirees and conservative, frugal-minded folks who like to save their money instead of invest in the market or spend every penny.

These lower rates coupled with the highest inflation rate in years is quickly eroding the value of a saved dollar. As is typically the case, this economic policy encourages spending and actually hurts those that are hunkering down and cutting back to hang on to the money that is in hand.

The rate cuts are not designed to help “savers” or the average American struggling to make ends meet, rather they seem to help the average financial institution, by inducing more spending. This quote by one of the financial luminaries really seemed odd to me the other day.

"Let’s face it, the U.S. consumer is dependent upon housing prices and stock prices and with both of them sinking rapidly the outlook for the economy is not good.’" WILLIAM H. GROSS, chief investment officer of the bond management firm Pimco.

I think he’s got it reversed. Stock prices and housing all depend on the consumer. If the consumer stops buying, those financial institutions that depend on stock prices and house prices are doomed for negative growth and lower valuations.

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Guess who is buying stocks?

While nearly everyone else is selling and running out the door, one of the greatest investors of all time is doing just the opposite. Hmmm

Warren Buffet’s Berkshire Hathaway continues to add to it’s positions through this market turmoil. He bought another 1.2 million shares of Burlington Northern Santa Fe, BNI, on Wednesday through Friday of last week paying an average of $77.10 a share. BNI is holding steady and closed at $76.51 on Tuesday.

I wonder if he is kicking himself for jumping in too early? If he had waited until this week, he could have bought the stock for $708,000 less. Probably not. Once he makes a decision about a stock, he buys in increments until he gets to his final desired holding amount. With all the cash that he has on hand right now, I imagine he will be adding even more BNI.

BNI is a good solid company, but I am not sure what is attracting Buffet. Growth is projected to be moderate, debt to equity is way too high for my comfort zone at 76%. I have read some speculation that he is interested in other assets that BNI holds, namely real estate. It’s that kind of insight into a business that is not readily available to the average investor that puts the individual at a distinct disadvantage. Not only is he able to undercover the gems, but he also has more access to information to detect the potential time bombs about to explode.

I fully intend to follow his lead and make some purchases in the near term, but instead of searching and screening for undervalued, strong balance sheets - maybe it's time to pick up a few more B shares, BRKB.

Since we’ve had a series of bad market days that can really test one’s confidence and resolve in sticking with an investment plan, I included this link to a short flick for a little inspiration.

Thank MLK, the markets are closed today!

Its going to be a rough opening to the market on Tuesday, based on the performance of the markets around the world Monday. Check out these one day declines for the leading national indexes:

Pan-European Dow Jones Stoxx 600 index SXXP down 4.3%
French CAC-40 index FR down 5%
German DAX 30 index DX down 6%
U.K. FTSE 100 index UKX down 3.6%

Losses have been attributed to the financial sector, continued recession fears and the disappointing proposed economic stimulus plan from POTUS.

We haven’t seen declines of this magnitude in a long time. Fortunately, for many reasons, I don’t think we will see anything like 1987 when there was a 20% drop in the US market in one day.

The new year continues to be a market freefall and that may be for the best. The market has got to shake out and I would rather see it wrung out quickly and sharply than to drag on for the whole year.

The Flight to Safety – Money Markets at record levels

I always keep a stash of cash in a Money Market fund. It’s usually a hefty amount – at least 3X my annual expenses. It serves multiple purposes:

1) It’s my emergency fund. Notice that I said 3X my expenses and not 3X my salary. If necessary, I could live for 3 years on this money.

2) It provides some asset diversification with a solid rate of return at almost no risk. My portfolio is heavily weighted in stocks. I have very little in bonds, so I consider this as my only fixed income asset.

3) and it's my holding area. All new money coming in to my portfolio first goes through this money market account. I invest from this account using dollar cost averaging as well as one time stock or mutual fund buys to keep my asset allocation balanced.

In volatile markets, like the last couple of months, I have continued to make the automatic DCA purchases, but have held off on any other buys. I don’t expect to find the market bottom, but I would like to wait until I think the market is sufficiently wrung out, before investing large sums. Consequently, my Money Market account is starting to balloon.

This does not go unnoticed by the financial community. In fact, they are watching and waiting for all of us to flee to the safety of MMs. Since, people tend to put their money into MMs in times of uncertainty, they reason that once MMs reach record levels and the market is wrung out, stocks will then rally.

Money Markets are now at record levels
MMs are 30% above the previous peak in 2003. Wow! This must be the sign. But, hold on. Would you believe that the amount invested in stocks is also at record levels? The equity in stocks is 43% above the previous peak set in 2000.

We have had a very successful bull run for the last several years building a lot of equity into the market. Of course, that 43% number is based on current stock prices and as the market continues to decline that number will also decrease.

Show me the Money
To get a better idea of where the money is going, we need to look at the two assets relative to each other. I have included the chart below (from Minyanville) which combines the data to come up with a ratio of total Money Market assets to total stock fund assets. The chart gives a very good indication of investor sentiment.

Money Market assets are currently 40% of equity fund assets, well below the bear market peak of 77% following the dot com bust. I consider the dot com bear market to be akin to the 40 or 50 year flood – its going to flood again and again, but it is unlikely that it will be as bad as the 2000 disaster. So, I don’t expect that we will hit the 77% number, but we do have a ways to go before this market turns around.

14 Rules for keeping your Head in a Troubled Market

It's days like these, when the market is showing so much weakness, that I like to revisit some sage investing advice. The following rules are based on the writings of Robert Menschel, a 50+ year veteran of Wall Street and author of Markets, Mobs & Mayhem: How to Profit From the Madness of Crowds These rules can help you keep your head when everyone else is losing theirs.

I especially like to re-read #2 – the stock market always comes back. I have seen it rebound several times in the last 20 years and am expecting it to do that again. I also have been taking note of some very interesting potential buys. It's for times like these that I have stashed cash on the side to take advantge of the sale price of stocks like BRKB and AAPL.

1. Remember that at the time of extreme fear in the marketplace, when all the excess has been wrung out, great buys are all over the place.


2. Remember, too, that the stock market always comes back, no matter how shocking the events that drive it down. Within three years of the December 7, 1941, attack on Pearl Harbor, of John Kennedy's assassination, and of the 1993 World Trade Center bombing, the market was up anywhere from 21 percent to 81 percent.


3. Define the sandbox you want to play in. Invest in growth-value companies that have records of consistent sales and earnings performance, management committed to a defined strategy, and with strong franchises that are highly focused. Only buy these stocks at sensible multiples and don’t add new companies unless you are willing to sell the weakest.


4. Have a buy strategy and stick with that. Buy in to a stock in steps, instead of at one price. Once the stock price is within range, begin with an initial buy in of 25% of the total desired holding. Then add increments of 25% to reach 100% of your total buy.


5. Stick with what you know. Invest in companies that create products and services that you can personally field-test day in and day out.


6. Stick with who you are. Be aware of your own risk tolerance. Understand that what is considered too risky by one might be too cautious for another. When your risk tolerance and portfolio are not aligned, bad decisions can follow.


7. And stick with companies that know what they are, too. Invest only in companies that stay focused on their core competency and have a strong franchise. Menschel also recommends avoiding technology companies because industry changes are so rapid that most of them turn into commodity businesses with no lasting franchise.


8. Always do due diligence. Invest your money only after thorough study. It's the mistakes that kill your investment performance. Evaluate the downside risk as much as the reward side, and you'll never have to be brilliant.


9. Never make a buy or a sell decision in your broker's office. Brokers are too close to the roar and the feeding frenzy of the crowd. Take time to make your decisions.


10. Buy for the long term. If you were to die tomorrow, would this be a stock you would want your heirs to hold? It sounds morbid, but it is not a bad test to apply. Stocks should be for the ages, even if we won't survive them.


11. Accept a little boredom in your life. Greedy management bent on making overpriced acquisitions gets the headlines, but good companies with superior management teams and a culture of teamwork, turning out good, usable, affordable products, make money. Look for companies selling at a reasonable multiple, generally no more than 50 or 60 percent greater than the rate of growth in earnings.


12. The faster a stock has a run up in value, the faster it is likely to run down. Almost no company can safely grow earnings faster than 15 to 20 percent a year without attracting fierce competition.


13. It's the small things, not the big ones, that count. In baseball, homerun hitters get all the attention. Investing is simpler: Hit for average, swing for singles, not the fences. This race is ultimately to the sure, not the swift; the tortoises, not the hares.


14. And finally, Never forget the miracle of compounding. A modest 8% rate of return will double your initial investment in 9 years and nearly triple in 14 years.
    

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Cutting the Cable – now that’s an Economic Indicator

Bloomberg is reporting that - AT&T Inc., the biggest U.S. phone company, faces "softness'' in its consumer business because of slowing economic growth, Chief Executive Officer Randall Stephenson said.

The shares dropped the most in more than five years after Stephenson said AT&T is disconnecting more home-phone and high- speed Internet customers for failing to pay their bills. The pressure hasn't affected the mobile-phone unit or corporate sales, he said at a conference in Phoenix today.

These folks are not switching....they are failing to pay their bills. As a result, they are being cut off from what has become an integral part of society. The internet is a social center; it entertains, informs and alleviates our boredom. Nearly every one expects to have internet access. It has become an entitlement. This can not be an easy choice. It's one thing to reduce spending by cutting out lattes, but internet access? Ouch!

To me this report is a telltale sign that it’s starting to trickle up – if you know what I mean. The average guy has been feeling the economic pinch for some time and now it’s affecting the bottom line of one of the largest companies in the US.