REVIEW: Stock Investing For Dummies, by Paul Mladjenovic.

Posted: July 1st, 2008 | Author: | Filed under: Investing, Reviews | Tags: , , , , , | 4 Comments »

review stock investing for dummies photo REVIEW: Stock Investing For Dummies, by Paul Mladjenovic.

What I like most about this book is that the author doesn’t try to “sell” stock investing to the reader, but covers the basics like the difference between investing (including stocks, money markets, CDs) and speculating.

At first glance, this book seems very similar to Getting Started in Stocks by Alvin D Hall, but this book is not nearly as nuts and bolts about investing as is Hall’s book.

Mladjenovic covers basic terminology and concepts like: appreciation (capital gain), risk vs. reward, and the concept of yield. He also briefly covers the various Stock Exchanges: NYSE, NASDAQ, AMEX.

But the heart of this book is Mladjenovic’s key success factors.

Key Success Factors:

  • Analyze yourself.
  • Know where to get information.
  • Understand why you’re investing: Seeking appreciation (capital gains) or income (dividends).
  • Do your research.
  • Understand how the world affects your investments.
  • Understand and identify “megatrends”.

Analyze Yourself.

Determine how much you own and how much you owe. This is where the concept of assets vs. liabilities is brought into the discussion. Using these two categories, he encourages the reader to create and assess his personal balance sheet. This exercise not only provides an eye-opening window to the reader’s financial state, but it provides a basic skill that will be used later when analyzing individual companies when looking for stock to buy.

The focus of this step is to determine and understand your Net Worth. Later sections of the book focus on growing your Net Worth.

Know Where to Get Information.

Here, the author stresses the importance of using multiple sources for information and advice. He lists some key online resources, such as U.S. Securities and Exchange Commission (SEC) in general, and EDGAR (the Electronic Data Gathering, Analysis, and Retrieval system) in particular. He covers different kinds of brokers and how to decide the right one for you, but he also discusses how to check the SEC, National Association of Securities Dealers (NASD) and the Securities Investor Protection Corporation (SIPC) to ensure that your broker does not have any black marks on his record. Incidentally, the NASD is currently known as Financial Industry Regulatory Authority (FINRA).

Understand Why You’re Investing.

Know your purpose!

If you want income, invest in dividend paying stock. If you want appreciation (growth) invest in growth (typically non-dividend paying stocks) stocks.

Stocks are a tool, a means to an end. To simply state that you are investing to “get rich” is not a plan. This part of the book covers short term, mid-term and long term goals. The author provides sound examples of when to invest in each type.

In one example, he recounts the story of one man who’s investment “advisor” put his child’s college fund money into Internet stocks circa 1999. Who know’s if this is true, but it is a prime example of why the latest investment fad is not a good place to stash your long term funds. Similarly, don’t have your emergency fund in stocks, but DO invest in stocks for long term like retirement (if your retirement is more than 5 – 10 years away).

This flows nicely into the topic of investing style: conservative vs. aggressive.

Conservative looks for a proven record, large cap stocks with market leadership and perceived clout. Conservative investors are looking for long term, consistent growth, but not a roller coaster ride of growth stocks.

Aggressive investors look for “jack rabbit” stocks with great potential and capital gains possibilities (no dividends). Such stocks tend to be innovative (i.e. new technology or service) and generally small cap.

Do Your Research.

This section is devoted not so much to where to get your research, but what kinds of things to look at when gathering your research. For example, the author discusses comparing a prospective stock to its respective index to see how well it performs against its peers. Most people have at least heard of the Dow Jones Industrial Average (DJIA), but Mladjenovic covers many other indices than just the DJIA. He also recommends visiting www.djindexes.com to analyze each index so that you can understand how they are weighted, and what exactly they track.

A quick visit to the site indicates that there are many indexes, and some are quite exotic like the Dow Jones DIFC Arabia Titans 50 Index. When investing in index funds, it’s best to stick with broad based indexes like the Wilshire 5000 and S&P 500 or sector indexes.

Mladjenovic outlines the following relevant questions when analyzing a company:

  • Is the company making more net income than it did last year?
  • Are the sales increasing?
  • Do you understand the company’s industry?

He suggests that if you’re looking to invest in growth stocks, you should only invest in such stocks IF the company is profitable, AND if you understand where they derive their income AND from where it generates sales. This is good advice, but I’m not sure it pertains only to growth stocks.

Other factors in determine potentially successful stocks:

  • Industry buying. Are mutual funds buying the stock you’re looking at?
  • Analyst attention. This can offer positive reinforcement IF it backs the research you’ve done independently
  • Influential Newsletter. See above.
  • Consumer publications. If consumer reports rates a product of your company as good, that’s a positive influential factor.
  • Management team. The company should have a management team with a strong history of success.
  • Growth of earnings.
  • Growth of equity.
  • Insider buying. If management is buying, they probably know something good about the company.

Mladjenovic does a good job of covering the basics of risk in growth stocks as well as possible Enron like companies. He uses Enron quite a bit as an example of how the numbers alone are not always enough if the company’s management is corrupt. In my opinion, this is another reason why individual investors should stick primarily to index and mutual fund investing, unless they are really going to take the time to baby sit their individual stocks. However, if investors do decide to take on individual stocks, Mladjenovic does a good job of outlining the application of stop loss orders to limit the downside. Again, he uses Enron as an example here.

Just to round out the section, he discusses IPOs and why they are rarely worth the risk, and covers DRP’s and dividends. He details how to determine when a dividend is “safe” and gives a good overview of the benefits and drawbacks to high yield stocks, and provides safer alternatives (bonds, treasuries, CDs, etc..).

He only touches on covered calls and options, but mostly refers to “Stock options for Dummy’s.” This is probably 1 third up sell, and 2 thirds good sense since these topics are not essential to becoming a solid investor.

Mladjenovic also stresses the importance of paper investing to improve your knowledge and risk tolerance.

Understand how the world affects your stock.

Mladjenovic spends a bit of time discussing various types of economic indicators: coincident indicators, lagging and leading economic indicators (LEI) and how to determine their effect on your investments.

He discusses causes and effects of interest rates, provides a good overview of larger economic indicators and ties it all together with what they mean and how they factor into a stock’s performance.

There is a good overview of how a bull market works (spawning from the bottom of a bear market) and how to avoid being gored by the horns of a mature bull market. He provides strategies for investing in a bear market as well as a bull market.

He also offers many useful links and resources for further study:

www.financialsense.com

www.freemarketnews.com

www.prnewswire.com

www.hoovers.com

Understand and identify “megatrends”.

A megatrend (as defined by Mladjenovic) is a trend that has reaching impact on the population and hence economy and stock market.

Some megatrends are:

  • The advent of Internet
  • The aging of the U.S. population
  • Rising energy prices
  • The overheated housing market
  • The hot international and emerging market stocks

He spends quite a bit of time talking about another big megatrend: Debt.

I think he gets a bit preachy about debt, energy prices and derivatives though. These are serious topics and carry sway over the economy and the stock market, but at times the tone seems a bit too “sky is falling” to me. That being said, his discussion of the risk that the enormous debt the U.S. government AND citizens have accumulated is pretty scary stuff and should not be looked at too lightly. In the end, I’m probably being a bit too picky here. icon smile REVIEW: Stock Investing For Dummies, by Paul Mladjenovic.

Mladjenovic recommends the following to take advantage of megatrends – look for companies with:

  • A strong brand (examples include Coke and Microsoft)
  • High barriers to entry (example: UPS and FED Ex)
  • Focus on research and development (example: Pfizer and Merck)

He wraps things up with a discussion of megatrends for the current decade and past decades: US large cap of the 90′s, Japanese stocks of the 80s, commodities, energy and natural resources of the 70s and 2000s.

Examples of future megatrends are debt, derivatives, aging of the boomers, and emergence of China and India.

Mladjenovic also does a great job of illustrating how the main stream media often amplifies trends just when they are ending, thus acting as a contrarian indicator!

Conclusion.

Stock Investing For Dummies gets at the roots of investing, rather than providing a how to guide. But how you go about investing is as important as what you invest in.

It is for this reason that I believe it makes a great companion read to Getting Started in Stocks by Alvin D Hall, Both books are a good place to start but I think that neither provides enough information on its own for the beginning investor.

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REVIEW – The Automatic Millionaire

Posted: March 27th, 2008 | Author: | Filed under: Debt, Retirement, Reviews, Saving | Tags: , , , , , | 4 Comments »

5106RN0DJZL. BO2,204,203,200 PIsitb dp 500 arrow,TopRight,45, 64 OU01 AA240 SH20 REVIEW The Automatic Millionaire REVIEW: The Automatic Millionaire, By David Bach “A Powerful One-Step Plan To Live and Finish Rich”

FROM THE BACK:
“Do you want to live rich and retire richer? Rich enough to do what you want to do when you want to do it? Rich enough to stop worrying about money? Rich enough to make a difference and help others?”

Sure, we all do! – Sounds like an infomercial. David Bach makes big promises in this book. The first couple of pages are full of wonderful promises like following his system will make you a millionaire, and his system doesn’t require discipline or a budget. How real is all this? Read on…

The book begins with a story about Bach teaching a finance class (I think it was of the continuing education sort, found at many high schools) and meeting a millionaire couple. The couple was the exact opposite of the millionaire stereotype. They looked very middle class and never earned much more than $50,000 a year, yet they had amassed well over a $1,000,000 at age 52. They tell David that they did it by paying themselves 1st with a 401(k) plan, and living well below their means – avoiding debt like an illness. This then becomes the basis of David Bach’s Automatic Millionaire System.

The heart of the book (and the system itself) is comprised of 6 major points:

  1. The Latte Factor
  2. Pay yourself first
  3. Make it automatic
  4. Automate for a rainy day
  5. Automatic debt-free homeownership
  6. Automatic debt-free lifestyle

Let’s examine each one at a time.

The Latte Factor.
This has become David Bach’s stock in trade. It is a very catching way to say, “find and cut unnecessary spending”, and in the sound bite culture of today it plays well. He offers the genesis of the phrase in a compelling example using a student’s daily habit of buying a non-fat latte and muffin before class everyday. He walks the reader through the math of just what that $5 a day habit costs in a week, month, year, a decade. It should definitely start you thinking about your spending habits in a new way. It did for me! By the way, it might not be a latte – that’s not the point. The point is there is probably something in your usual spending that you can do without or at least cut back on. It might be cigarettes, a bottle of wine, beer at the grocery store every week or lunch out with co-workers, etc…

Pay Yourself First.
Bach’s point here is a simple one: Use the money “found” from step one and pay yourself first. He does make one important point that many “Pay Yourself First” proponents rarely mention. Specifically, most people don’t truly pay themselves first – they pay the government first. This is due to the withholding tax (enacted in 1943, to help fund the war effort for WWII), which allows Uncle Sam to take a big chunk of your paycheck before you even see it! The only way around this governmental obstacle to wealth (legally) is through the use of pre-tax retirement accounts such as 401(k)s, 403(b)s, IRAs and SEP IRAs as a means to truly pay yourself first.

Make it Automatic.
This is the backbone of the failsafe aspect of this plan. When it happens without your involvement, it will happen with more success. This has never been easier to do. With more and more financial institutions offering electronic fund transfers (EFTs), you can setup an automatic payroll deduction and have that money go to your 401(k) before you ever see your paycheck – just like Uncle Sam does with the withholding tax! It’s easy, and incredibly effective. Like Ron Popeil says, “Just set it, and forget it!”

Automate for a Rainy Day.
This is an extension of Making it Automatic. In this section he talks about routing that automatic deduction to a high interest savings account for emergencies, or rainy day spending.

Automatic Debt-Free Homeownership.
This is applying the same methodology to your mortgage. By making one extra payment per year (or paying every 2 weeks instead of every month) you can pay off a 30 year fixed rate mortgage in little more than 20 years.

Automatic Debt-Free Lifestyle.
This section is all about avoiding and eliminating debt.

  • Step 1. Say no to debt (avoidance)
  • Step 2. Renegotiate current interest rate(s) on the debt you already have.
  • Step 3. Consolidate your debt into fewer monthly payments, preferably at lower rates as well.
  • Step 4. Take what you would pay yourself first (10%) and split that into half to pay down debt, and half to save for the future. The point here is that you still make progress on both debt and savings over time, which has a tremendous positive psychological effect to keep you motivated.

The key point here is that getting out of debt is automatic, not instantaneous. I followed similar steps myself, which you can read about here: 7 steps to getting out of debt.

Philosophy behind the book:

The stated philosophy behind the book is one that most people can easily get into:

  • You don’t need to make a lot of money to be rich.
  • You don’t need discipline.
  • You don’t need to be “your own boss.” (Yes, you can still get rich being an employee)
  • By using what I call the latte Factor (R), you can build a fortune on a few dollars a day.
  • The rich get rich (and stay that way) because they pay themselves first.
  • Homeowners get rich; renters get poor
  • Above all, you need an “automatic system” so you can’t fail.

For the most part, the philosophy outlined above is a good one, though a bit simplistic. Don’t get me wrong, I love simplicity (I like it so much I chose to make that the first word in this blog’s name) but I think it implies more than it can deliver. I think that the Automatic Millionaire System is an effective one for building wealth, but I think Bach throws the word “rich” around an awful lot. If people think they’re going to amass a Warren Buffet like fortune, they are in for a rude awakening. Still, the Automatic Millionaire is an incredibly simple, effective and failsafe way to build wealth over the long term.

The book is laid out in an easy to digest format of short, pointed sections and bullet lists. This makes for a really quick read. David Bach also provides a lot of resources for finding and researching investment companies, banks, stocks and bonds.

Final Analysis.

David Bach’s claims sound outrageous, but they really aren’t. In fact, if anything they are rather pedestrian and not especially meaningful. For example, a $1,000,000 30 years from now will not be the same as $1,000,000 today. In fact, you would need approximately $2,806,793 in 30 years to have the same purchasing power as 1 Million today, assuming an inflation rate of 3.5%.

In this light, the claims of amassing 1 million dollars in 30 years from the latte factor and compounding interest not only seem reasonable, they seem down right inadequate! Of course, it’s still better than nothing and so it’s worth doing… just don’t think it’s the easy road to the high life.

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