Risk (not the game)

You know, I frequently hear people talk about their investments in these terms: "Oh, I couldn't possibly tolerate losing money. I have my savings/retirement/investments in bonds and savings accounts." Since I work in a female-oriented field, these comments invariably come from women, and invariably those women are in their 30s and sometimes even their 20s. And it drives me crazy.

I am not an ultra risk taker; I've given up my dreams of skydiving and rock-climbing. Nevertheless, investing in the stock market and taking the risk of buying a stock that might go down -- very low in the risk factor, in my opinion. I want to ask those women -- have you ever bought something with a credit card and not paid it off at the end of the month? They will probably say yes (who hasn't?). Well, I want say, you've lost money to the tune of 15% and possibly 22% and 30%. Yesterday the stock market took a downturn and it caused my total losses on my stock to hit 10%. Yes, I recently bought stock with an IRA I didn't expect to have (and therefore use for "playing") and yes, I've consistently lost with these stocks. Do I care? Not really. Sure, I'd love to see my money grow, but I don't expect to sell tomorrow, and all the stocks are fairly risky. They have, in the past three months, gained 10% and lost 10%. I'm not worried about now -- I'm pretty sure that each and every one of them will still be around in 10 years, and I'm also sure that they will have gained by then. And that is all that matters.

Sure, Wild Oats might go out of business, and solar technology might flop. Those are possibilities. And if they do, I stand to lose money. But I think about this; during my college years, I paid over $2000 in interest on my credit cards. I pay nearly $700 in interest every month on my mortgage. From a logical standpoint, I am losing money hand over fist; but then again, I'm not. All choices have some sort of risk involved; buying a home over renting, using a bank rather than my mattress for my savings, using my mattress rather than my bank for my savings. I only wish I had more money available to invest in what looks to me like a sale.

I'm not the only one; market analyst Donald Luskin agrees with me, and I enjoyed his article: Market Correction Makes Stocks More Attractive. All I could do when I read it was cheer, and I just wish that more women would be willing to take risks -- with their money, and with their lives, too -- for the great returns they can get from it.

And I never want to forget one fundamental truth about investing: No matter what, stocks always have a positive expected return.

Stop for a minute and think about that seemingly simple statement. It's actually quite profound, and it's something that most investors have never really thought about consciously.

If markets are at all efficient, then risky securities like stocks must be priced so that the people who hold them — the people who take risk — will get rewarded for that risk-taking, at least on average. If the fundamentals get worse, then stock prices will fall so that from their new low level investors will still have a positive expected return.

Yes, that's an argument for always holding stocks. But believing that argument doesn't make me a perma-bull. It just means I think that over time I'll get rewarded for taking risk.

Markets aren't always perfectly efficient, nor are they perfectly right. Sometimes the risks in the world aren't fully appreciated by markets — or at least the risks I think are out there aren't. Then I'm bearish. Sometimes the risks in the world are overemphasized — or at least the risks I think are out there are — and that's when I'm bullish.

The 12 kinds of ads

The 12 kinds of ads is a great slideshow from Slate (scroll to the bottom to click next). The one ad I don't see there is the "this is such a great deal" ad and I have to confess, that is the one to which I am the most susceptible. I tend to see great deals and then overbuy. This is in part because I don't really like shopping, and hate to return over and over looking for deals. It is also hard to pass up really good sales -- I just got a knit cotton top at Eddie Bauer for $6 (normally $20) and while it was a great deal, I probably could have lived without it if I hadn't seen the sale. Nevertheless, it is useful to see the tactics ad executives use, and I agree with the author, that it is like dispelling the magic from a magic trick to see how things are put together.

Harry Potter and the Stock Market

Recently I was one of those "aged 8 to 80" fans that stood in line for the seventh and final Harry Potter book. This year, I opted against standing in line for three hours at Borders to save $15 (that's only $5 an hour, people, and I had to work in the morning!) and instead paid full price to a local bookstore. The fantastic part about that was, not only did I support a local business, I simply drove up to the parking lot at 11:55 p.m., and at 12:05 a.m. someone handed me a beautiful, new copy of the book. Yes, I could have done what BostonGal did, and ordered through Amazon (and gotten the book on Saturday) but all in all, $15 was a cheap ticket to a huge party Friday night, and one where taking my 5-year-old didn't garner stares of disapproval. My son and I actually went to three parties on Friday, all of which were free, and he won $5 worth of Harry Potter paraphernalia, so I guess that puts us down to $10 for the night. I'm a hard core fan so it was worth the extra money to me, although I did balk at the $12 I spent on snacks, so I suppose I should revise that total to $22 (or $27) for not waiting until Saturday. Still, I don't think I would have missed it for the world, and it was worth every penny to see kids dressed up as house elves and adults dressed as their favorite characters. It makes my brief foray into the scene of the Rocky Horror Picture Show crowd during my college years seem pale in comparison.

Nevertheless, despite trying to be financially minded, it never occurred to me to look at Scholastic stock during all this. I am buying stock these days but I still don't think enough about the things I use and what would be good to buy. So far my stocks have fluctuated wildly -- the stock I bought via Barron's recommendation is doing well, and the two that I chose (and that I know) are down about $90 between the two of them (roughly 10%). I'm not fussed; I know that stocks are a long-term investment and not a short-term gamble. I have watched relatives take the equity from the homes via loans and gamble it away (literally) on day-trading. I don't anticipate going that route anytime soon! So, despite the warning in this article, Scholastic is on my list of stocks to consider.

Can Harry Potter's Publisher Make Magic, Too?

Sometimes you can take the old Peter Lynch adage about investing "in what you know" a little too far. Take the Harry Potter mania that has been sweeping the Western world since midnight on July 21. That's when fans from eight to eighty dressed up, lined up and paid up ($34.99, full price) for the seventh and presumably final adventure of everyone's favorite schoolboy wizard.

Some 8.3 million copies of J.K. Rowling's Harry Potter and the Deathly Hallows flew off the shelves in the first 24 hours after its release, according to its publisher, Scholastic And it looks like more than one investor in the Barnes and Noble queue figured that shares in Scholastic (symbol SCHL) might make some magic, too.

...

Instead of reacting to the hoopla surrounding the final book in the series, investors would be better served focusing on Scholastic's fiscal fourth-quarter earnings, released on July 19th. The company posted a profit of $40 million for the quarter ended May 31, or 93 cents a share, up from $38 million, or 91 cents a share, in the same quarter a year ago. But analysts had expected earnings of $1.02 a share. Result: Scholastic shares sank as low as $33 on July 19 before rebounding to close at $34.21 that day.

...

Longer-term investors needn't give up on Scholastic, however. Not including Hogwarts-related earnings, the stock is selling at just 16 times Crum's fiscal '08 earnings estimate -- a reasonable value, especially considering the stock's comparable four-year average price-earnings ratio of 18. FBR's Godsey sees Scholastic trading up to $38 a share over the next 12 months, as the rest of Scholastic's businesses continue to grow modestly -- an indication that there likely is life after Harry Potter, after all.

But for now, savvy investors will resist the urge to transfer their excitement about a great book to an okay stock. You've got plenty of time to read all 784 pages -- and then some -- before revisiting this one.

Farming Loans for the Poor

Recently I received a rather desperate e-mail from a Tibetan nun in India that I have sponsored the past few years. Her father is a farmer and, in order to jumpstart his crops, he took out a small loan. His crops failed and now he is unable to pay the loan back.

I asked Nam, the sponsee, how much her father took out in his loan, and it took a few e-mails before she finally responded.

You have also asked me how much money did father borrowed,I asked him and he told Rs.20,000. Its[sic] quite much but all are doing the same.

I looked up 20,000 Indian rupees to see how much that is in dollars: $496 by the current exchange rate.

For $500, a farmer may lose his land...it's hard to believe. I will send her some money (not all of it) and I sent her a warning about loans, losing your land to the bank, etc. It seems that the farming crisis of the mid-20th century in the U.S. is happening in other parts of the world now. It is particularly upsetting because Nam and her family are refugees -- apparently, the loan came from a refugee resettlement project of some kind.

This story gives me a little perspective on the stress of our debts right now. What would Nam think about our $186,000 worth of mortgage, credit card and student loan debt? Probably she would pass out in horror. Five hundred dollars is enough to decimate her family.

Someday I may look back and think my debts were pretty minor...I hope. Until then, I will be scrambling to find some money to send to Nam. I hate to reward bad behavior, but I also pledged to keep her family from starvation. Always the poor are hit the hardest...

Mackey slams my first stock investment

John Mackey, Chief Executive of Wild Foods, gets caught slamming competitor Wild Oats.

SAN FRANCISCO (MarketWatch) -- The Securities and Exchange Commission has opened an informal inquiry into Whole Foods Market Inc. Chief Executive John Mackey's anonymous posts to Internet message boards, according to a report late Friday on The Wall Street Journal's Web site.
The SEC is looking into Mackey's roughly eight years of anonymous posting, which included positive remarks about his own company's health and disparaging remarks about a company Whole Foods (WFMI : Whole Foods Market Inc WFMI40.50, +1.50, +3.8%) is currently attempting to acquire, the report said.

I wouldn't care about this, except that I recently invested my IRA in stocks, and Wild Oats was one of the stocks I chose. This year we were finally forced to invest in IRAs because of our tax burden. I also finally navigated the wild world of purchasing stocks, with a little help from Banc of America. I find it funny that someone as important as John Mackey would spend time slamming his competitor on a message board, and even funnier that he now stands to be a part of that competitor. Brings to mind the old adage, "Don't burn bridges," and is one reason that, after suddenly turning in my two weeks' notice at work, I sat down with my supervisor and let her know that I liked her and was not quitting because of her for any reason. Why do I care? Because it is nice to keep those bridges in good working order. She might the one to hire me back in a few years. (For future posts: How I made less money working than I will unemployed.)

High End Homes Hold Up In Value

This article from the New York Times shows a continuing trend -- the rich are getting richer, the middle is trying to hold steady, and, as the author put it, the poor "are getting creamed." It is so hard to bypass those roadblocks from one segment of the population to another...

The homes that are having a hard time selling are the average-priced homes,” said Vanessa Justice, a real estate agent with Pacific Union GMAC in the Bay Area, where the median house price is about $750,000. For upper-end homes, she said, “it’s actually pretty crazy right now.”

It has been a while since real estate agents used the word “crazy” in a positive way, but Ms. Justice is onto something here: the high end of the market is surviving the slump much better than any other segment. Even as foreclosures keep rising and overall sales continue to plummet, more expensive homes have staged a bit of a comeback in recent months. They’re spending less time languishing on the market than others, and their prices appear to be holding up better.

This split in the market helps explain why the sales of Manhattan apartments, some of the priciest homes in the country, have remained fairly strong...

...Finally, both the recent rise in interest rates and the problems in the mortgage market have had a much bigger effect on low-income and middle-class buyers than affluent ones. It’s become harder to get a subprime mortgage, while the uptick in interest rates this year has added about $100 to the monthly payment on an average fixed-rate 30-year mortgage.

As Mark Zandi, chief economist of Moody’s Economy.com, summed up the market: “The low end is getting creamed. The middle is struggling. The high end is running on its own dynamic.”

I'm back...finally

It's hard to believe I haven't posted on this blog for three months. Three months! But even my primary blog (family blog) has really suffered the past few months.

We've been in the midst of trying to sell our house, and man, has it been a nightmare. I should have posted my entries about it here, since it is mostly a financial decision, but I posted it to my family blog and now I regret it. I got some unnecessary comments (your house will never sell! Never! The market sucks!) and finally just took the posts down.

So, here is a summary of what we have done so far, and a look at our financial downfalls.

1. We spent more than we needed to fixing up the house, and a lot of that money went to fixes that then needed to be fixed.

We asked our realtor to recommend someone to help us fix a lot of little things around the house, and she recommended a three-man handyman team to us. Sensing we didn't want to spend a lot of money, she recommended guys who worked for cheap.

Big, big mistake.

I rarely pick the lowest bid when I have someone bid on a home improvement project because I find that people who bid too low tend to do shoddy work. It just goes with the territory -- if you're working for bottom dollar, you don't work as hard. So, I tell the person I pick that they weren't the lowest bid but they emphasized quality and that's what I am paying for.

Well, I went with what the realtor recommended this time and it slapped us in the face. The three guys were lazy, charged me by the hour (and worked slowly) and I had to go along behind them and fix things they did wrongly or poorly -- setting up a dishwasher incorrectly, painting house trim sloppily (still need to fix this), not cleaning up after themselves (they dumped red paint in my backyard the day before my open house -- impossible to get out and looked like a bloodbath in my backyard). The final straw was when they asked for their last checks and when I went to check their work, only half had been done and what had been done was sloppy. So, I canceled their checks ($60 charge), had an estimate done on what their work was worth and paid only that. I then had to pay someone else to fix the dishwasher, and because they had smoked cigarettes in the house (yes! cigarettes!) I had to repaint the living and dining room and most of the ceiling in the area where they worked, pay to have the carpets professionally cleaned again ($130 loss) and I had to clean filters and scrub floors to get the smell out. The money was one thing -- the mental anguish and extra work another. This lesson learned -- pay for the guys who do good work.

2. Poor planning.
We seem to be buying stuff and then rebuying and then rebuying again...for example, we had the carpets cleaned twice ($340 total) and now we are replacing the carpets because they are just too worn, so we take a $340 loss. If we had planned ahead and thought things through, we would have done this from the start. After all, I've lived there five years and am fully aware of the poor condition of the carpets.

I painted the kitchen cupboards -- a huge project that took two weeks -- and I couldn't figure out why it was taking so long or why the paint kept peeling off. Turns out I was supposed to use oil-based paint instead of acrylic, something that neither my realtor nor any of the handymen mentioned, and now the cupboards will, at some point, need to be resanded and repainted. Again.

We elected not to fix the cement slab that makes up the front porch but it looks so cracked that we went out and bought bamboo mats to cover it. The mats were $100 and we didn't realize the Tucson sun would make quick work of them, so they are already warping and crumbling after only 6 weeks. We will probably have to throw them away and resurface the concrete anyway. Resurfacing will cost around $350 (if we can do it ourselves), but the extra $100 means we will spend $450.

3. Financial consequences
All in all our credit card bill has gone up around $8500 since we decided to put the house on the market, plus the cash we've paid for fixes. Now we are in a place where we either have to do some major renovating and move back in, or reduce the price of the house severely and sell it for cheap. Since we can still rent out the guesthouse and that will pay for a home equity loan, I am planning to move back in, but it kills me because when we put the house up for sale again (we plan to relocate in the next year or so) we will have to do it all over again. It isn't possible to live in a house with kids and not need to paint and fix everything before putting the house up for sale, and right now my house at least is clean, painted and mostly empty. Our lease here is up in August, however, and we can't keep paying rent and a mortgage indefinitely. I am resigned to it and a small part of me thinks it will be nice to have a clean, mostly-repaired and freshly painted house to live in again.

We learned a lot of hard lessons throughout this whole process, but I also learned to be more grateful for my home. I've looked at a lot of other houses in the same price range and I realize, now, that I really have a beautiful home in a nice neighborhood. We have family nearby and never need to worry about someone breaking in or trespassing on our property because we know all our neighbors. The rental we are in now was broken into a few nights ago while we were sleeping -- I heard the intruder and the person fled, thankfully, without confrontation (and nothing was missing). I am not the sort to be intimidated by this sort of thing (I don't have any illusions of safety in the first place and I know that random theft and violence happen) but I realized that we are more protected in our other house because of its location. I also am grateful for the air conditioning that we installed four years ago -- we have swamp cooling in this house, and boy, it's hot right now. Swamp coolers drop the temperature about 20 degrees, so in Tucson, when it's 110 degrees outside like it is now, the temp inside only drops to around 90 degrees or so. I had forgotten what life was like sweating under a fan all night, and I am anxious to sell and then move elsewhere, or to go back to my lovely air conditioned home.

If and when I do, I want to walk around and enjoy my grassy back yard (grass!), my fully functioning showers (one shower here does not work and the other is so small we can't bend over but must crouch down to pick anything up), and the comfort of knowing exactly where everything is. I plan to replace floors, add shelving in the kitchen, resurface the hall bath and add a kitchenette to the guest house before we move back in, all as part of the home equity loan. I guess one more silver lining came out of this -- we have been so frugal the past five years we haven't wanted to put a lot of money into upgrading our house (we've mostly done sweat equity, landscaping and fixing things that were really, really broken) and this is sort of forcing us to do this. You can see the free fall on my net worth to the right though -- it isn't cheap, and we are giving up our financial goals in order to do it.

The good news is that all this work means our house will be worth more and hopefully will fetch a better price when we do sell. I'm keeping my fingers crossed the investment will work out.