Things I have learned.

When I was about 12 give or take 2 years in either direction I asked my Dad about stocks and the stock market, how to read the prices in the local newspaper and buy stock.  I knew my grandma Jones had 3 houses and a fat saving account and she did it with J.C. Penney’s stock (JCP).  He wasn’t very happy and told me “You only throw your money away on the stock market.”  He went on to tell me about Bill across the street who had invested $500 in stock in a Uranium mine in Nevada and it was now worthless.  Bill should wallpaper his bathroom with it.

My Dad was poor and died poor.  Bill got $5000 for his worthless Uranium mine stock and bought a new car, Grandma Jones always had money, and Uncle Darwin traveled with his Sears stock (SHLD) until the day he died. 

Lesson number one; poor men don’t invest in the stock market, rich men do.  As a general rule a chart of stock market go from the lower left to the upper right, quoting Dennis Gartman of the world renowned Gartman letter.  “Individual stocks can and do go to zero but as an assets class stocks end higher.  http://cloud.thegartmanletter.com/ Which is a good thing.”  (Here is a link for a free trial subscription.)  I like it but can’t afford it on a school teacher’s salary.  Do sign up and read Dennis’s letter to see what a good advisor does for his clients.  Dennis always gives you the best read on the general direction of the markets out of all the analysis’s I have heard and follow, and it is an enjoyable read.  Disclaimer Dennis is usually early, and once and awhile he is late on his tells on market directions and swings.  So wait until the market turns to buy or sell.  If you want to have money you need to buy stocks.

Here are some facts about today that renown economists were writing about as far back as the 1800’s.  (Read the whole article on CNN.) “Nearly one-third of the American middle class, mostly families with children, have fallen into poverty or are one paycheck away from poverty.  http://www.cnn.com/2012/04/27/opinion/smiley-west-u-s-poverty/index.html?hpt=hp_t3

Middle-class parents have been thrust into poverty when one or both lost their salaries. There are now single mothers and fathers, military veterans and former high-wage employees desperately trying to re-enter a workforce that no longer pays living wages.  You are not guaranteed a good job that pays wages decent enough to care for your family, buy a car and a home, and live reasonably comfortable life.  We live in a society where corporations put profits over people. We march to the beat of political leaders who have decided the richest 1% of the people in this country deserve generous tax breaks and preferential treatment while most of the 99% are forced to pay unbalanced shares of the tax burden and live on less and less.  Corporations are run by the über-rich -- the same people who shipped American jobs overseas, broke the backs of labor unions paying a fraction of the salaries once paid for manufacturing jobs, turned full-time work into part-time positions, and snatched health care benefits away from employees.  Today's staggering unemployment isn't the stepchild of the Great Recession. It is the illegitimate offspring of a long-abided system that places the profits and concerns of big business and the mega-rich above the rest of us.”  This is all from the CNN article.  By Tavis Smiley and Cornel West, Special to CNN.  This is what trickle-down economics is.  The key most people are so far down the trickle doesn’t get to them.  It is the same political and economic system we tried and failed with in the 1920’s.  I big boom followed by an even bigger bust.  Don’t trust a politicians or economists who recommend this system.  It did not work in 1929 or in 2008.

The disturbing thing about the CNN article is not that it is true today.  The disturbing thing is it is all part of Adam Smith’s Invisible Hand and is working against your standard of living.  The theory is the individual will maximize his own gains in a free market.  All this was identified by economists after Adam Smith’s work, pointing out that labor will always be paid the lowest wage an employer can get away with.   

As long as there is a laissez-faire economic philosophy in our regulation of the banking industry and regulation of the stock and labor markets, there is a disadvantage to the middle class and an advantage to the über-rich.  You have to offset this by becoming an anti-consumer or a Saver and Investor.  You can make your money work for you, money works on Sundays and Holidays, it never sleeps, and with compounding you can untie yourself from your job and weekly paychecks.  To do this you need to start using another old economic rule Compounding Interest/Investments and a monthly savings program.  This is the same philosophy recommended by Benjamin Franklin and the Bible.  “A penny saved is a penny earned.” Benjamin Franklin Biography.  Proverbs 22:7

“The rich rule over the poor, and the borrower is servant to the lender.”  It is clear that you have to be an anti-consumer, saving instead of shopping.  A consumer is one who uses up, "one who squanders or wastes,".

From the chart on simple compounding by Jelson25 on Wikipedia, you can see that compounding will double your investment over time.  What the chart doesn’t show is a monthly savings program.  Your goal should be to get one month’s salary as dividend/interest income.  Next step 2 month’s salary.  You get the picture. 

In my first move into stocks I trusted my broker.  He recommended that I buy an oil drilling company called Global Marine.  I purchased 400 shares on margin.  Global Marine went bankrupt.  Lesson number two; bankers, brokers, TV analysis’s, stock analysis’s who work for banks and brokers, mutual and ETF managers and politicians have an agenda, you are not part of their agenda in a good way.  You are lucky if it is a simple straight forward agenda you are told about and understand most times it is a hidden agenda.  ETF and mutual fund managers don’t care if they or you make money, believe it or not they don’t get paid on performance, just how much money they manage, they don’t have to do well to keep their job just keep your money in their fund.  Bankers and brokers feed off us “Muppets” as Goldman Sack’s employees call you and I the individual investor.  Politicians sometimes like to make the market and the economy go down so they can elect their boy for president as the GOP has been doing this year.  (2012) In fact according to a study (here is the link) http://finance.yahoo.com/news/memo-members-1-move-northeast-102003138.html

from the Economic Mobility Project at the Pew Center, by Erin Currier and Diana Elliott.  “The states with more upwardly mobile populations were more likely to be liberal-leaning states, and those with more stagnant populations were more likely to be conservative-leaning states.”  You may consider moving to a more liberal state, avoiding GOP spin entirely especially on taxes.  Really redistributionist tax policies are in reality paying for a soup kitchen.  Truth I would like soup kitchens.  I think children deserve free food at schools, I believe in education, especially since I can’t afford private school tuition.  And if one of my tax dollars for every ten of millionaire’s tax dollars goes to these things so be it.  Does Ma or Pa millionaire really need another Coach Purse, Tiffany diamond, second home, or larger house for the 2.5 people in their household.

News people mostly report negative news.  Negative news sells ads.  They make it seem larger than life.  Think it through.  Get the information and listen to as unbiased news as you can and decide for yourself.  By the time the news is reporting a market on a rocket up the move is done.  Fox news wants to elect GOP politicians not make you money on the stock market.  Jim Cramer wants to protect your money and educate you, not get you to time the bottom or take risks.  The Nightly Business Report (if it is still on?) is just that a report of what happened and will be meaningless unless you learn the code words (see lesson seventeen).

Bankers want to sell you loans so they get bigger commissions, not help you.  Same with Brokers, Financial Planners and Financial Analysts.  They just want to sell you product not make you money. 

Market Analysts work for banks and investment companies.  They always have an opinion most analysts are poor.  Some have a hidden agenda, they do work for a bank after all.  Most miss the moves and tell you to buy way after the low and near the top, and will then ride the stock all the way down telling you to sell at the bottom.  They will not even tell you to sell they will say cryptic  things like increase your cash position to 30%.  My personal favorite (translation sell most of your investments), another favorite  X bank changed its rating on Y stock from Strong Out Performer, to Follows the Market. (translation sell). X bank changed its rating on Y stock from underperform to outperform (translation buy).  Many times by the time they change their rating the major part of the move is complete.

My next move was into Neuberger Berman Partners Fund, that year it was ranked as one of the best mutual funds by Money Magazine.  It followed the market down very closely, but when the market was up the fund did not follow the market up like it did on the down swing.  Although I made a small return it was not want I expected at all.  As I read their annual report after the second year in the fund I noticed that there were a lot of high ranking employees with the last name of Neuberger?  Or married to a Neuberger?  Is good management really in the blood?  I don’t believe it is.  Lesson number three; Magazines and the other financial newspapers report the past history and are not good to invest with.  And, Lesson number four; all mutual funds and half of the ETF’s (not all are junk, just half are).  The managers running the fund are more interested in having your money on account than they are in making money.  In fact some are rip offs entirely.  A few ETF’s are investable.  I have never made money with a mutual fund.  Mutual funds you get with your work 401k plan are poorly managed at best.  If you don’t have a work matching amount you would be better off investing in a brokerage.

Whenever I work for a company that has a matching 401k I put in the maximum amount to get the match.  I have had 10 + different investment firms managing my company 401k over my lifespan.  Lesson number five; The funds in your companies 401k are always managed by the worst managers since they have a captive audience.  The only increase I ever got from these 10 different firms and all the big firms were there at one time or another, is the companies match.  Invest to the max to get the companies matching contribution and no more.  Put the funds into a safe option and move it whenever you change employers.  By 2010 my company 401k accounts were exactly at where they were in 1995.  The performance was spot on the money on the way down and only following the market up 25% of the S&P 500 gain.  An market ETF following the S&P 500 or DOW would have done better.  Company 401K mutual funds have the worst mutual fund managers, because they know you are stuck and can’t move your money outside the company selection.  Put in the matching dollar amount your company max no more.

When I started investing for myself I went with E.F. Hutton and then later to Merrill Lynch.  I had to withdraw the bulk to buy my first house but left some in Merrill Lynch’s share builder account (I believe it was called the Blue Print account but I could be mistaken.)  Most of my increases were eaten up by fees.  When I closed the account 10 years later someone at Merrill Lynch had moved my account to an agent in Hawaii.  I have moved to an on-line manager, Charles Schwab.  Except for the web site changes made it seems just after I have gotten used to the last web site I am for the most part very satisfied.  Lesson number six; If you don’t have a million dollars in your account stay with an on line broker who specializes in the small investor.  I like Charles Schwab here is their web site and phone number if you are so inclined to ask questions.  https://www.schwab.com/  800-435-4000  I have not tried the other 2 big on line manager your own investment brokers but have considered moving several times mostly Schwab changes their web site or the time I applied to work there and after 3 interviews did not get a chance.  Be sure you get good 24/7 phone help and good help once on the phone or mover your account.

Diversification is important.  Depending on how you break them up there are at least 9 different sectors.  Consumer Staples, Energy, Financials, Health Care, Industrials, Information Technology, Materials, Telecommunication Services and Utilities.  When food stocks were hot I had all food stocks, before Kraft got bought out.  When oil stocks were hot I was all in oil stocks, until oil dropped and Global Marine went bankrupt.  When technology stocks were hot I was all in tech stocks, until the market dropped in 2001.  Then I was in tech stocks from 2001 to 2005 and my stocks were finally back to even.  Lesson number seven; Diversify your stock portfolio.  You don’t want the pain of sitting on huge losses.  Also you don’t want to sell after a huge sell off, because if you picked good companies the market and stock will come back.  Oh if I had only kept some of those oil or food stocks in 2000!

Lesson number eight; avoid the general class of bad investments airlines, companies that use stock buy backs, avoid 75% of all tech stocks, if you are going to buy a ETF you must know what is in it and what it tracks.  As far as I can tell airline stocks only makes money for airline executives.  Cronyism is rift in Wall Street and in many boards or directors. Do not invest in companies that buy back their stock, buy backs are a game executives play to increase their paychecks, not to help investors.  Avoid most tech stocks, tech executives love buy backs, they dilute shareholder value by issuing stock options to themselves, there seems to be more sleight of hand with tech stocks, they waste company cash on personal goals.  Many boards of directors and executives are not out to increase shareholder value, they are not interested in your money just their money in tech stocks this is doubly true.

Example the FaceBook IPO.  The company if fairly valued would have been issued at $28 not $38.  Apparently information was leaked during the roadshow that was available to some investors not everyone. 

Everyone is biased; all people have a prejudice.  This also goes from newspapers and television news.  Lesson number nine; Do not listen to or read known biased news.  Rupert Murdoch is biased and it carries over to his newspapers and television news.  Stay away from all Fox News and The Wall Street Journal.  Stay away from all local television news and newspapers, unless local for you is New York City.  I like CNBC and Bloomberg on television.  If you must read a newspaper my recommendation is the New York Times or Washington Post.  CNBC andBloomberg show the least bias and prejudice in their reporting; The New York Times and Washington Post are read by the über-rich and have the most information of use.

I prefer CNBC and like to Watch Cramer’s Mad Money, Fast Money and Options Action.  Jim Cramer says we have to do homework.  Part of my homework is watching those 3 shows where ever they are on.  Bloomberg is also good and I move to that station when the more biased reporters and regular guests are on CNBC.  You can identify those personalities by their focus on which political party they support instead of the news.

The markets general direction is 50% of your stocks movement.  Lesson number ten; Your stock moves 50% in the general direction of the market and the rest is company specific.  Your main homework is to know which direction is the default direction of the market at that moment in time.  If the market is going down then it is time to buy your company if the other 50% is good.  What is the other 50% of your stocks movement?  It is what is going on with that stock / company.  As Dennis Gartman says "I operate under the old rule that there is never just one cockroach, when ill news comes out there is usually more ill news to follow,” the bad news you hear is usually only the tip of the iceberg.  A good example is Chesapeake Energy Corporation and Audrey McClellan cronyism at its worst him and his board of directors.  This board in 2009, decided to pay Mr. McClendon $12.1 million for his map collection, reimbursed him for his losses in Chesapeake stock with margin calls, allowed him to moonlight in the building secretly running a Hedge Fund.  The company and its prospects are the other 50%.  If this half of your investment is good the other 50% will come back with time. 

Lesson number eleven; You need to use all the tools the market has to offer to make money.  Options are tools you can use to earn more return.  You need to learn how to use options.  There are free training seminars put on by the Options Industry Council please go to these training seminars.  These free training are offered once a year.  The Options Industry Council agenda is easy to see, they would like you to buy and sell options.  Since I am suggesting that selling options always makes you money if done correctly and sometimes makes you money if you buy them.  Also you lessen your risk if done correctly, so these training seminars will help you.  Go to the www.optionseducation.org web site and or call 1-888-OPTIONS (1-888-678-4667).  Get your name put on the list, they send me a postcard 2 or 3 months before every training seminar. 

When you want buy stock you can instead sell a Put.  If the stock drops to the price you wanted to buy it at, then you will get the stock automatically.  If the stock does not drop then you will get to keep the funds you received when you sold your Put and the Put will expire as worthless, and then since you did not get the stock you wanted at the price you wanted you can sell a second Put.  When you buy a stock then at the same time sell a Covered Call at a higher price on the stock.  One of two things will happen.  The stock goes down or stays about the same price, then your call will expire as worthless and you keep the funds you got for selling the Call.  The stock goes up above your call, you make the gain on the stock it sells and you keep the money you got for selling the Call.

Lesson number twelve; You have 3 of the tools the professionals use on the market Dividends, Options, and Diversification.  View this as a 5 card poker hand.  In many cases you will win with 3 of a kind in poker.  Sometimes you still loose.  The other two cards are know your company and know the direction of the market.  That is why you are using Lesson 9.  Watch Mad Money, Options Action and Fast Money every day they are on.  You will get a general idea on important company specific news and the general market direction up or down. 

Lesson number thirteen; If the market is going up and you are worried you missed out, and want to buy stock it is a bad time to buy stock.  If the market is going down, no end in sight to the downward losses in your portfolio and you do not want to buy because you are afraid, that is a time to buy.  Buy when there is blood in the streets, sell when everyone is buying and the market is going up like a rocket.  The stock market and investing is emotional.  If you go into a store and cloths are on sale you buy, if clothes are marked up high then you don’t.  Because of your emotions you will do just the opposite what you do with your with stocks.  You will have to keep your emotions under control.  I can tell when the market will turn.  I am usually in a panic to buy stocks they just keep going up and up and I am not on board and feel like I have missed out.  I can tell when it has bottomed I just want to sell it all.

Lesson number fourteen; Set up your account for margin, but treat it like a charge card you must pay off in a year.  Set your account up to margin.  Then don’t.  Sound counter intuitive?  It is there for the emergency bargain sales the market has every now and then.  The sales are not planned in advance or advertised.  There are only two ways to use a margin.  One you are buying GE stock and have enough for 90 shares.  But I recommend 100 share purchases and selling a upside call (this is called a buy right).  It is a win win.  Stock goes up you make money, dividend reinvesting you use lesson number one and Compounding, or the stock goes up so high and so fast it is called away again you make money, the stock goes down your call expires you loose less and use Compounding until the stock goes up.  So you borrow on margin the difference between the 90 shares and the 100 shares as long as you can pay it off in a month (like paying your charge card off completely at the end of each month).  There is a second way you use your margin.  If there is a IPO like Google, or FaceBook, or VISA and you expect it to double on the first day/week/year, buying on margin can be useful.  Request as many shares as you can margin in your account.  You probably will not get them.  If you do get your bargain IPO sell your other stock and buy it.  Sell your IPO when the time is right and repurchase your stock.  Alternatively, IPO and reorganize your portfolio getting right of the entire margin you can’t pay off within one year by monthly payments.

Lesson number fifteen; The market is rigged against the small investor, know the odds, terms, and tools and you can change the odds in your favor.  Christopher Cox when he was chairman of the Securities and Exchange Commission got rid of regulations that protected the market from short sellers, example eliminating the "uptick rule" or "tick test”.  A laissez-faire economic philosophy outlook at its worst.  Then there are EFT’s that are weighted at 2 or 3 times, that means that for one dollar the EFT gets away with spending 2 or 3 dollars.  These are designed to manipulate the market and are for traders.  High frequency trading and the flash crash.  Another example is the Facebook IPO.  Pricing the company in the billions and at the top end of its value after allowing the über-rich in before the IPO and giving 90% of the shares traded to hedge funds and firms.  Then again to at the banks issuing the IPO; the analyst’s at all three lead underwriters cut earnings estimates for FaceBook so the über-rich could dump the stock at 42 on the public or small investors.  Again with the FaceBook example the company stuck it to the small investors, the people who managed this whole deal from the company side are privileged.  Unless they lose the lawsuits, do you think they lost money on this deal?  This is a classic example of FaceBook’s board of directors and top management greed added to institutional greed (hedge funds) and underwriter greed (banks) and company greed.  The greatest sign is the GOP über-rich call to let the auto companies go bankrupt, this was stupid.  They were shorting the stock and purchased the bonds and were going to reap fantastic profits due to another bubble caused by Allen Greenspan and GOP control of congress for 12 years and the white house for 8.  Deregulation killed our economy; just look at GOP hated Canada.  Their economy and banks did not crash!  Of course they don’t believe in deregulation or letting laissez-economic philosophy crush the middle class.  For the first time in America the middle class is shrinking.  No surprise with W in the white house for 2 terms and 12 years of GOP controlled congress.  His Dad used the same failed economic theories and dumped the economy during his term in office.    http://www.mybudget360.com/american-middle-class-debt-serfdom-only-path-to-middle-class-through-giant-amounts-of-credit-card-housing-debt-loans and http://www.westernprogressive.com/2011/12/graph-middle-class-share-of-us-wealth-fell-between-1983-and-2009.html  review the graph from the last web site.

http://blogs.reuters.com/david-rohde/2012/01/13/white-house-the-american-middle-class-is-shrinking/

Another article:

http://www.usatoday.com/money/economy/story/2011-10-25/middle-class-disappearing/50914822/1

Read “You Got Screwed!” by James Cramer.  James Cramer’s books are all good reads for your investment education.  I learned the most from his biography “Confessions of a Street Addict”.  Although I think you need to read all his other books first to get the most from confessions.  I have read all his books except one. 

So just knowing it is rigged and the odds you can even the odds and level the playing field.  You don’t have to sell when the market crashes.  In 2008 did you really think that every company in America would go into bankruptcy?  You needed to get out of stocks that were not so good and move to the better stocks while they were down.  And, not panic!  I have a friend who sold Citibank at .69 cents per share.  She should have moved her money out as it went down and purchased stocks in strong companies.  The 2008 crash I made money after 4 months.  Notice the graph above, this puts a new light on the it’s morning in America campaign slogan.  A truer slogan would be it is late afternoon in America.

Rule number sixteen; Teachers, Financial Advisors, Bankers and CPAs/Accountants know nothing about how to manage money.  I get tired to hearing how I need to have a loan on my home to cut my taxes.  I am a teacher and was an accountant before that.  Managing money means to spend less than you make, and save / invest the difference.  Not minimizing your tax bill.  Dave Ramsey knows how to manage money.  Get “Total Money Makeover” by Dave Ramsey.  Mr. Ramsey understands money management better than you CPA!  He puts it into simple language you will understand.  For the more technical aspects of money management I would recommend “Your Money or Your Life” by Joe Domingueg and Vicki Robin.  Joe Domingueg’s book reads more like a college textbook.  The basic premise of this book is you are trading time which equals little pieces of your life span for money.  Make sure it is a good trade and you are not spending your life away on impulse spending, being a consumer in other words.  A consumer uses up and destroys resources, in its simplest definition; is that really what you want to be?  What are you buying with little pieces of your life here on earth? 

Either you manage your money or it will manage you.  Money is a harsh taskmaster.  I can’t recommend these two books enough!   Debit will crush you.  Just because you have a wonderful job and make a lot of money doesn’t mean you will have it for the rest of your life.  Just ask someone who worked for Motorola, or in Detroit.  There used to be debtors prisons.  Even though  the prisons were considered inhumane and closed, you will be in our systems prison to interest payments, debit and charge cards.  I worked with a girl who couldn’t buy milk and bread for herself and her children for the next week and a half until she found a charge card while cleaning out a drawer. That charge card had $5.00 more until it too was maxed out, just like all her other charge cards were.  She had just purchased a new house, and if it did not close she was living in a shelter because the current house she had purchased 2 years ago was getting reposed that same week of closing.  I never did ask how many charge cards she had.  I think she was in a prison of her own making.

Lesson number seventeen; Learn the brokers code words.  A Bear Hug and a Straddle are not titles or scenes from a XXX movie.  Learn the lingo so you know what they are talking about.

Lesson number eighteen; Pay off interest bearing loans.  If you buy a car and it is 3 years no interest great.  If you are paying 6% on your home loan and you can’t make 6% on your investments then pay off the loan.  Let’s see you can buy a stock that pays 4% interest.  You can then sell a covered call on the stock every quarter and make about the same amount of cash as the dividend.  You are making 8%.  Then you are ok having a home loan.  If you buy a biotech with no dividend, you are not making any return until it goes up.  Then use the money instead to pay onto your interest bearing loans.

Lesson number nineteen; Never make a decision to hold a stock to pay less taxes.  Taxes are one day of the year April 15^th.  I have lost money trying to turn a short term capital gain into a long term capital gain.  The stock and investments you hold are 365 days of the year.  Watch the newest movie “Wall Street”.

Lesson number twenty; Good things to know.  Did I say focus on what you make not how much your tax bill is?  Three times at least, I can’t repeat that enough.  Just make more to pay them and move on we live in the greatest country in the world pay the bill to keep it running. 

Bears make money, Bulls make money, and pigs get slaughtered.  (translation don’t get greedy)  It doesn’t matter where you bought it at, it matters where it is at.  (translation if your stock turns to poop flush it and move along, Enron at $20 that you purchased at $80 comes to mind, it never came back take the twenty)   Bull Market.  (translation waiting for your stock to pull back think of a stampede)  Bear Market.  (translation buying a stock when the market is falling, is like standing in front of an angry bear you will get mauled). 

Catch a falling knife (translation buying a stock on the way down sharply).  Faith is not a strategy.  If you are holding a stock that is going or has gone down you need to have a reason that you can explain to a disinterested third party why you still own the stock.  Buy Right (translation buy a stock and sell a upside covered call on that stock at the same time). 

There is no such thing as a one day event.  Just as in WWII the United States is effected by those people over there isolationism is not an economic reality, our economy cannot boom while the rest of the world is in recession.  I am not saying it is recession now!  On the opposite note our economy can’t be in recession if the rest of the world is booming.