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You can also visit our main Web site at www.automaticinvestor.com.
Contents
1. Quotation of the Month
2. Main Article: Why I Don't Own a Ferrari
3. Wealth Building Scams
4. Investment Advice
5. Errors in Investing
6. Interesting Links
7. Recommended Reading: Think and Grow Rich
8. Automatic Investor Question of the Month
9. Legal Notices: Keeps the Lawyers happy
Quotation of the Month
"Being rich is having money; being wealthy is having time."
Have a favorite quote? Tell us about it by sending it to
eletter@automaticinvestor.com
Main Article: Why I Don't Own a Ferrari
I've always liked Ferraris. What's not to like? Low, wide and sleek, the
car exudes speed and power. In 1986, when I saw my first Testarossa, I
decided then and there that that was the car for me!
Unfortunately Testarossa's were going for about $250,000 at the time.
After adding up my savings, I found I was $248,000 short - not to mention
the cost of taxes and insurance. Needless to say, I didn't get the Ferrari.
Today my wife and I find ourselves in the unenviable position of looking
for a new (to us anyway) vehicle. After doing some research, I created a
short list for consideration. There were two trains of thought running
through my mind when I created the list.
The first was to get a nice practical vehicle.
The other was to sell the house, cash in the savings, and plunk it all
down on a brand new Ferrari. Of course I understood that we could buy 8
very nice vehicles for the cost of one Ferrari. But the Ferrari has a top
speed of 181 mph and can accelerate from 0 to 60 in 5.4 seconds! That
means I can (theoretically) make the trip from my house to my office in
downtown Vancouver, 30 miles away, in less than 10 minutes. And merging
onto the freeway? Absolutely no problem whatsoever. I wondered what my
wife would say (actually I knew what she would say, but sometimes you have
to ask to be sure).
"We are not selling our house to buy a Ferrari!" And with those words my
hopes of owning a fine Italian driving machine were dashed for a second
time. So we settled on a two year old Ford.
Now there's nothing wrong with a Ford. Compared to a Ferrari, it gets
better mileage and is cheaper to insure, maintain, and repair. It also has
more room for passengers and baggage. Furthermore the traffic from my
house to the office generally moves at 30 mph during the morning commute -
so the Ford's top speed is more than adequate. And we can purchase it
outright and don't have to sell the house.
So from a logical, common sense, point of view, I think we can all agree
that the Ford is the better choice. If you were in my shoes, you'd
probably nix the Ferrari idea too. Given this, you might wonder why the
Ferrari is so appealing? I can only assume it is for one reason and one
reason only: Flash (or head-turning ability). Nobody stops to look as a
Ford drives by. Neither does anyone pull up beside a Ford, roll down the
window, and say "Niiiiiiiice car!" And I've yet to see a case where
someone, on the sidewalk, will turn to a Ford driver and give him a hearty
"thumbs up." Rather, the Ford is pretty much invisible. Just another
vehicle on the street.
Even with the Ferrari's head-turning ability, however, it's easy to see
that purchasing the Ford is the better idea. Unfortunately I believe that
many of us make Ferrari decisions without consciously realizing it. Case
in point, how many times has someone you know borrowed money to buy a
brand new luxury car? How about financing a vacation using a credit card?
Or buying stereos and furniture on the "don't pay until the New Year" plan
and then not being able to pay when the New Year arrives? And the list
goes on.
One of the biggest problems in Western Civilization today is that people
don't realize that they can't afford half the things they buy. The
mentality seems to be that it's their "right" to own a big house, new car
and the latest consumer goods. And the credit card companies are right
there confirming it. Unfortunately this type of thinking is upside down.
Now there's nothing wrong with owning life's luxuries, but only if you go
about it the right way. Which of courses brings up the question of, "what
is the right way?"
The upside down approach is to purchase luxury items before having the
proper resources to do so. There are a surprising number of high-income
earners that aren't wealthy. In fact these people are carrying so much
debt, that the average welfare recipient is better off.
These are the people who will quietly laugh to themselves and think, "that
man can't afford to buy this $5 cappuccino because he's on social
assistance. I am so fortunate to have my high paying job." Then they'll
nonchalantly charge the cappuccino to their nearly maxed out credit card.
Of course they won't pay it off at the end of the month and thus will
incur an absurdly high interest charge. All the while they'll continue to
go through life oblivious to the fact that they are really only a few
paycheques away from bankruptcy. Truly the wealth-challenged live in a
fantasy world all their own.
The correct approach is to live within (or even below) your means and
concentrate on building your wealth. This leads to cash flow generation,
which then leads to the ability to purchase expensive consumer goods. The
wealth-challenged skip right to the part where they purchase the expensive
consumer goods, because they want instant gratification and, perhaps,
others to look at them with more than just a little envy. In essence they
go for the Flash. They then spend the next few years working hard to pay
for their purchases. In fact the cycle of debt usually continues and they
inevitably spend their entire lives building wealth for others (such as
the banks) rather than themselves.
Add to that the wealth-challenged person's usual habit of spending more
whenever he or she receives a raise, bonus or unexpected windfall, and you
can see why obtaining wealth becomes an impossible dream. It never occurs
to the wealth-challenged to stop spending, pay off debts and invest.
Rather this person has been hypnotized into believing a myth of epic
proportions: that "wants" are actually "needs." A sad state of affairs at
the best of times, but a potentially deadly one for someone with mounting
debts.
What's more, you don't have to be severely wealth-challenged to buy into
the myth. Many "regular folks" unwittingly mortgage their future to obtain
a few "must have" consumer items "right now." Although they may not be
anywhere near bankruptcy, they will never be truly wealthy either.
There are many ways to build wealth, but it comes down to doing two main
things. First, stop spending and then eliminate all debt (especially
high-interest consumer debt) as soon as possible. By doing so you are able
to keep more of your earned income for yourself. In other words, if you're
in a hole, stop digging.
Second, convert earned income into growth and income producing assets as
quickly as possible. These assets can take various forms, but the most
common are stocks, bonds and mutual funds. Such assets increase in value
over time without the need for their owners to actively work for the
gains.
People who have no debts and whose wealth increases every year, without
them actively working for it, are in the best position to purchase luxury
items. Their money works for them 24 hours a day, every day of the year -
even when they are vacationing on the French Riviera. And these are the
people most able to purchase, say, a Ferrari from the proceeds of their
growing assets.
Most of us aren't quite there yet, but nevertheless it is a realizable
goal - especially if you start young. Everyone's goal should be to
generate enough income from their investments, so that they can more than
comfortably live without the need to actively work.
Hopefully you're well on your way to eliminating your debts and building
your wealth through sound investments.
So the next time you're thinking of borrowing money to vacation in Bermuda
(the Ferrari decision), give your head a shake and settle for the Bed and
Breakfast around the corner (the Ford decision). It may not elicit envious
stares from your friends, but you'll sleep better knowing that you're
right side up, building your wealth so that one day you'll not only
vacation in Bermuda, but you just might purchase a winter residence there.
Mortgage free.
In the meantime if you happen to come across a smiling guy in a Ford, feel
free to pause and give him a hearty "thumbs up." I have it on good
authority he won't mind.
Did you know?
In the 1980s if you were out of the market on the ten best
trading days of the decade you missed one-third of the total return.
Wealth Building Scams
Perhaps you've seen the infomercials, program-length TV commercials,
touting easy ways to make money in real estate, or to get low-interest
government loans or grants to start a new business or go to college. Maybe
you've seen advertisements in the classified section of newspapers or
magazines promising "big money" business opportunities or work-at-home
schemes.
Some infomercials and other advertisements may encourage you to purchase
program materials, such as books, audio and video tapes, or computer
hardware and software. The materials can range in price from less than
$100 to several thousand dollars.
The Federal Trade Commission (FTC) knows these claims sound too good to be
true. The fact is that many of them are. The FTC continually investigates
companies that make false, misleading or unsubstantiated claims about
wealth building and business opportunity programs, and has found a pattern
in the sales pitches that can tip you off to a scam.
THE SALES APPROACH
Companies often use infomercials to promote their wealth building programs
and merchandise. These infomercials have the look, feel, and length of
real TV programs. They often imitate the format of genuine talk shows or
investigative consumer news programs.
The products being sold are often discussed as part of the program and
touted by paid "experts," "moderators," or "reporters." The programs may
last for 30 minutes, interrupted by advertisements for the show's
products.
Infomercial promoters of wealth building schemes claim that if you follow
their methods, you can make substantial sums of money through real estate,
investments and business opportunities, or get low-interest government
loans or grants. These claims may be false, misleading, or
unsubstantiated.
YOU'RE INVITED
Some of the infomercials and advertisements invite you to attend seminars
where you can learn more about their "opportunities." More than likely the
seminar is a sales pitch. The smooth-talking salespeople may endorse the
programs, materials, or services or use testimonials to illustrate the
easy money you can make by using their products. Lured by the promises of
easy success and the exuberant atmosphere, you may invest in programs,
materials, or services without much thought. Later, like many others, you
might find that the program or business opportunity was essentially
worthless and that all you have are empty promises.
HOW NOT TO BE A VICTIM
Consider the following precautions if you're tempted to respond to an
infomercial:
Be skeptical about "get-rich-quick" advertising claims.
Ask the company for written substantiation of claims in their
presentations, especially those about success rates.
Be aware that the advertiser often pays "experts" who endorse a product.
Be cautious about "testimonials." They may be paid for. They may not
reflect the experience of most consumers.
Be wary of purchasing a program if company representatives give you
evasive answers or aren't willing to answer your questions at all.
Before you buy, decide whether the price reflects a fair market value.
Be wary of promises of free money or low-interest government loans. As a
rule, these are only available in limited circumstances.
Don't be pressured to purchase immediately. Good opportunities are not
sold through high-pressure tactics.
Before you buy, ask about the company's qualifying requirements and refund
policy.
Check out the company with your local consumer protection agency and
Better Business Bureau. They may be able to tell you if any unresolved
consumer complaints are on file.
Did you know?
If it sounds too good to be true, it probably isn't true.
Investment Advice
The following advice might seem like common sense, but it's amazing how
many people ignore it in the heat of the moment. So it bears repeating.
Hang up on cold calls.
While it is theoretically possible that someone is going to offer you the
opportunity of a lifetime, it is more likely that it is some sort of scam.
Even if it is legitimate, the caller cannot know your financial position,
goals, risk tolerance, or any other parameters that should be considered
when selecting investments. If you can't bear the thought of hanging up,
ask for material to be sent by mail.
Don't invest in anything you don't understand.
There were horror stories of people who had lost fortunes by being short
puts during the '87 crash. I imagine that they had no idea of the risks
they were taking. Also, all the complaints about penny stocks, whether
fraudulent or not, are partially a result of not understanding the risks
and mechanisms.
If it sounds too good to be true, it probably is [too good to be true].
Also stated as "There ain't no such thing as a free lunch (TANSTAAFL)."
Remember that every investment opportunity competes with every other
investment opportunity. If one seems wildly better than the others, there
are probably hidden risks or you don't understand something.
If your only tool is a hammer, every problem looks like a nail.
Someone (possibly a financial planner) with a very limited selection of
products will naturally try to jam you into those that he or she sells.
These may be less suitable than other products not carried.
Don't rush into an investment.
If someone tells you that the opportunity is closing, filling up fast, or
in any other way suggests a time pressure, be very leery.
Errors in Investing
It's always funny to look back over time and see the market with 20-20
hindsight. You can see things so clearly. However things might not be so
clear in the midst of a sustained downturn. When things start to become
muddled, keep the following thoughts close by. They'll help you with your
perspective.
Always have an investment objective when you build a portfolio. If you
don't, it's like getting into a car and driving wherever the road takes
you. Soon you'll be out of fuel and lost.
Don't buy too many mutual funds. Sometimes, in a futile attempt to
diversify a portfolio or follow a rising star, investors will buy too many
funds. The results will be nothing but duplication of holdings and
possibly fees. Not to mention a very cluttered and confusing portfolio.
Always fully research a one-product stock before you buy it. If a company
only produces one product and that product doesn't sell, guess what
happens to the profits of that company? In essence, a one-product company
has nothing else from which to generate income, so be careful and do your
homework.
Don't believe that you can pick market highs and lows (time the market).
There are millions of professionals who get paid big bucks every day to
try to figure out this one. Just think; if they can't get it right what's
the chance that you will.
Don't buy the hottest stock or mutual fund from last year. Typically, the
story and momentum has already been played out of these investments and
they are now overpriced. As a late entrant, you might bear the brunt of a
price pull back.
Did you know?
The cost of raising a medium-size dog to the age of eleven
is $6,400.
Interesting Links
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Title: Microsoft's Cunning Plan
Source: Economist
"IT WAS an annus horribilis for many technology firms, but last year was
particularly dismal for Microsoft, the world's largest software company."
(this link is not available from the archived version of the eGazette.)
Title: Are We Already in Recession?
Source: SmartMoney
"Some are predicting that the 10-year expansion is grinding to a halt;
others are saying we're already in the grips of a full-fledged recession."
(this link is not available from the archived version of the eGazette.)
Title: Time to Jump In With Both Feet
Source: TheStreet
"The time to worry is when the Fed is tightening, not easing."
(this link is not available from the archived version of the eGazette.)
Recommended Reading
"Think and Grow Rich," by Napolean Hill.
Based on Andrew Carnegie's formula for success, Think and Grow Rich takes
you on a journey through the recesses of your mind as it attempts to show
you how success is achieved by thinking in certain ways.
You can purchase this book at
Amazon.com.
Automatic Investor Question of the Month
QUESTION:
Automatic Investor allows me to set a number of parameters so I can tune
the software to take advantage of the specific characteristics of the
stocks in my portfolio. If I have more than one stock in an Automatic
Investor portfolio, how do I set the parameters so they take into account
the characteristics of each different stock?
ANSWER:
The answer to this question can be more easily understood by looking at
the different cases.
Case I: there is a single stock in your portfolio. In this case the
settings are optimized for the behavior of that particular stock. So
no further discussion is needed.
Case II: there are multiple stocks in your portfolio, but they all
have the same characteristics (i.e. they tend to behave the same
way). Again, the settings are optimized for the behavior of the
entire group of stocks. So changing the relative quantity of each stock
doesn't affect the overall characteristics of your portfolio. Therefore no
further discussion is needed here.
Case III: there are multiple stocks in your portfolio, but they have
different individual characteristics. Taken together they comprise
a "mutual fund" that has its own specific characteristics.
Furthermore, buying or selling different individual stocks changes the
relative quantity of each stock in the portfolio and thus changes the
"mutual fund's" characteristics.
This is by far the most difficult case for which to tune. In order do a
proper job, you must know the behavior of each stock as well as the part
it plays in the overall portfolio. For example, if stock A is very
volatile and stock B is not, then given equal amounts (i.e. dollar values)
of stock A and stock B in your portfolio, you would expect the overall
portfolio to be more volatile than stock B but not as volatile as stock A.
You can tune the parameters to reflect these characteristics.
Now if you suddenly increased the amount of stock B in your portfolio,
relative to stock A, the overall characteristics will tend to be less
volatile. So you would have to go back and tune to reflect the new
portfolio behavior (i.e. less volatility).
In this example, the "mutual fund" portfolio characteristics will be
somewhere between stock B and stock A in terms of volatility, but more
towards stock B. Every time you change the contents, you must revisit the
tuning parameters.
You can see that as the number of stocks (with different characteristics)
increase in a portfolio, the complexity increases exponentially.
Therefore it is highly recommended that you stick to either Case I or Case
II. Keep in mind that you can have one actual brokerage account, but
manage it with multiple Automatic Investor accounts.
So in case III, you could choose to manage both stocks A and B (they're
both in your one brokerage account) by using two Automatic Investor
accounts (one tuned specifically for A and the other for B).
Legal Notices
The Automatic Investor eGazette does not rent out its subscription list.
This newsletter is Copyright (c) 2001 by Aptus Communications Inc., Maple
Ridge, British Columbia. All rights are reserved, except that it may be
freely redistributed provided that it is redistributed in its entirety,
and that absolutely no changes are made in any way, including the removal
of these legal notices.
Automatic Investor is a trademark (tm) of Aptus Communications Inc., Maple
Ridge, British Columbia. All other trademarks are owned by their
respective companies.
THE MATERIALS CONTAINED IN THIS NEWSLETTER ARE PROVIDED "AS IS," AND APTUS
COMMUNICATIONS INC. EXPRESSLY DISCLAIMS ANY IMPLIED OR EXPRESS WARRANTIES
OR CONDITIONS OF ANY KIND, INCLUDING WARRANTIES OF MERCHANTABILITY,
FITNESS FOR A PARTICULAR PURPOSE, OR NON-INFRINGEMENT OF INTELLECTUAL
PROPERTY RELATING TO SUCH MATERIAL. IN NO EVENT SHALL APTUS BE LIABLE FOR
ANY DAMAGES WHATSOEVER, INCLUDING (WITHOUT LIMITATION) SPECIAL, INDIRECT,
CONSEQUENTIAL OR INCIDENTAL DAMAGES, INCLUDING, WITHOUT LIMITATION,
DAMAGES RESULTING FROM USE OF OR RELIANCE ON THE INFORMATION OR SOFTWARE
PRESENTED, LOSS OF PROFITS OR REVENUES OR COSTS OF REPLACEMENT GOODS OR
LOSS OF GOODWILL.
All statements and expressions are the sole opinions of the authors and
are subject to change without notice. This information is neither an offer
nor solicitation to buy or sell any securities mentioned. While we believe
all sources of information to be factual and reliable, in no way do we
represent or guarantee the accuracy thereof, nor the statements made
herein. The authors, members of their families, and/or entities with which
they are affiliated, may own stock in and have other financial dealings
with the companies who appear in this newsletter. To that degree, this
newsletter should not be regarded to be an independent publication.
YOU SHOULD VERIFY ALL CLAIMS AND DO YOUR OWN DUE DILIGENCE BEFORE
INVESTING IN ANY SECURITIES MENTIONED. INVESTING IN SECURITIES IS
SPECULATIVE AND CARRIES A HIGH DEGREE OF RISK.
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