Kirby on Finance

60 Minutes “Derivatives” from 1995

Unfortunately I didn’t catch this 60 Minutes clip from 1995 in which Steve Croft covers the topic of Derivatives. It’s worth watching, if just to see how obvious our current financial mess should have been.

Emotional Investing Doesn’t Work!

Last week a few stocks that I owned began to sell so quickly that I thought my broker had begun to just burn the stock certificates themselves. I began to panic because I thought a few of them were overbought and ready for a crash. Luckily the other part of my brain, the part that’s always calm and rational took over. A few of the stocks that I owned had no business selling like they were, and the ones that may have been overbought had strong arguments as to why they were still good buys for the long term. I decided not to sell. This decision saved me roughly $342 dollars as of the time that I write this.

I’m not writing this to brag that I was able to control my emotions and avoid panic selling. I often succumb to those feelings, but this time I avoided it. In fact, every time I’ve either bought a stock that I had no business buying, or sold a stock that ended up going on a nice run, I look back and try to figure out why I made the move that I did.

I’ve been looking toward growth stocks to avoid the daily stress of momentum stocks, but in the past I’ve usually bought stocks that were on an upward tear. It’s worked well for me, but the stress of doing it just magnifies all of my weaknesses. This has allowed me to figure out what triggers my emotional selling so that I may notice it and hopefully avoid it before I make the same mistakes again.

Jason Zweig of Money Magazine recently wrote an article addressing these issues and offered a few ways to help outsmart your brain and keep those rash, emotional decisions at bay.

“Whether your investments beat the market is largely outside your control. But some things are entirely in your hands: cutting your tax and brokerage bills by trading less often, and keeping your expenses down by relying on index funds or lower-cost managed funds.”

I think this is pretty good advice but really you do have much more control than Jason suggests. You’ve got to be able to research a company and know exactly why you wish to own it before you invest. If you can’t offer reasons as to why the stock would also be a bad purchase then you’ll probably not done enough homework to invest.

“If watching financial TV or clicking on investing Web sites gives you the itch to get rich quick, turn off the sound or use the “history” window on your Web browser to count how many times you visit the site each day. Just like a smoker trying to quit, you may need tricks like these to help bolster your self-control.”

This is right on the money. You don’t make a lot of money off the market overnight. If done well its continuous growth over time that will make you rich.

“Making an investing decision while you’re inflamed by the hope of a big gain is a terrible idea. Instead, reconsider after your anticipation circuits have cooled off. If you like a stock, try waiting two weeks without ever checking its price. Then study the company’s financial reports to estimate the per-share value of the business. Afterward, you can check the current share price—and invest only if the business value is higher.”

This goes along with what I said above. It’s rare in life that snap judgments work, and it’s probably even less likely that it’ll work in the stock market.

How your broker is ripping you off!

If you’re like me - you’ve got money sitting in your brokerage account waiting to be used on your next investment. I’ve justified this in the past because I feel like the more money I have in my brokerage the account, the “more serious” an investor I am. This silly logic is hitting me where it hurts - my bottom line. Check out the measly amounts of interest some of the major brokerages pay for money kept in a money market account as reported by MSN Money:

TD Ameritrade Holding pays just 0.1% on cash balances of up to $5,000 if you don’t ask them to give you a better deal. For cash balances up to $25,000 they pay just 0.4%. Up to $100,000 they pay 1.65% — even though the going return on money market mutual funds is around 4.8%. Ameritrade gathered $185 million in revenues by paying clients so little on their idle cash and then “sweeping” it into an account run by a banking partner, where the money earned Ameritrade a much higher rate. On average, clients held $5.7 billion a day in cash during Ameritrade’s last fiscal year, which ended Sept. 30.

E*Trade Financial pays the same as Ameritrade for the first two tiers, but for cash balances between $25,000 and $100,000 it pays out only 1%. On average, the broker paid just 0.87% on the $10.3 billion-a-day average that clients kept in brokerage accounts in the third quarter of 2006.

Charles Schwab pays around 1% on cash balances if you have up to $100,000 in assets, unless you ask them to do better. It pays around 2.6% if you have more than that. Overall, Schwab paid clients 2.56% in the third quarter of last year. Schwab earned about 5.1% and pocketed the difference.

Those numbers are pretty pathetic. I think it’s a shame that brokers don’t offer their customers a more reasonable return on their money. Sarah Bulgatz, who’s a Schwab Spokesman explains the “issue” by saying, “We really like having this conversation with our clients and educating them on what they can earn on their cash.” You see, they’re actually doing us a favor, by ripping us off!

Don’t give your broker a free loan [Michale Brush - MSN Money]

Why the S&P Returns 10%

Moneywise from The Real Returns had a recent post where he explained from “The Little Book of Value Investing” by Christopher H. Browne why the S&P 500 has historic returns around 10 percent.  The full explaination is over at his site, but essentially, you “take the sum of the long term earnings growth (6 percent) and the dividend yield (4 percent), and you get a long-term annually compounded rate of return for the S&P 500 of about 10 percent.”

Why S&P 500 Returned 10 Percent?  [The Real Returns]

Free stock trades?!?

A while back, I got an offer to do some work with Zecco.com. So long as you carry an account balance over $2,000, they offer zero commission internet stock trading for both market and limit orders. I decided not to work with them at the time, but I have given some consideration to opening an account with them to test out their trading platform. While I’ve been hesitant, ML from My First Million at 33, decided to take the plunge and offer up a pretty good review of Zecco.com. It’s well worth the read, and it’s made me think twice about trying their service.

Test Driving Zecco.com [My First Million at 33]

Cool Site: Stockpickr.com

A good friend of mine who’s really into investing recommended Stockpickr.com to me as a means to find obscure stocks and to see what stocks are being recommended in the great world of “groupthink.”  I’m not sure whether I’ll use this site in finding new investment opportunities, but I’m sure to spend countless hours clicking through the site to see why people like/dislike certain companies.  Here’s their own description of their site:

StockPickr is a free stock recommendation site that allows you to receive automated stock recommendations from thousands of portfolios, both professional and amateur, with a similar make-up to yours. Just enter your favorite stocks and within seconds you will receive new recommendations based on our internal algorithm matching your portfolio with the thousands of hedge funds, mutual funds and other peer portfolios (DIY portfolios) that have a similar composition. It also allows you to network, research and discover new great ideas in the financial market arena.

Stockpickr Website [Stockpickr.com]