Saturday, November 29, 2008

Be Alert to The "Canaries in the Coalmine"

The stock market closed higher Friday making it the best 5 market day streak since 1932. It seems like the is the year of breaking records. That said, I believe the market will eventually be retesting the lows made last week for the following main reason: there is still too much optimism among the general public.

Just look at all the hoopla and crowds still being generated for the Black Fridays sales event. People are still more eager to spend money and "charge it" than they are worried about the looming recession. I remember a conversation I had with some co-workers, and all the signs I pointed out as warnings were easily discounted:

Soul: Circuit City and Linen and Things going out of business..
Response: No big deal, those companies were just beat out by stronger businesses like Best Buy and Bed, Bath and Beyond.

Soul: CitiGroup slashing 53,000 jobs.
Response: They are not all in the US - that's worldwide.

Soul: The economy is slowing down.
Response: People just need to go out and do more shopping.

See a pattern here? There's no real fear yet despite the market drops.

This makes me think of Hurricane Ike in Texas this year- how news reports warned all those in the Galveston area to evacuate. The weather service even sent out a warning that said anyone who didn't evacuate faced CERTAIN DEATH. Even with that, many folks still decided that they knew better and remained in the area. When the hurricane finally arrived, many of those who decided to stay and ride it out died. Those who needed to be rescued afterward now admitted that they had made a mistake by staying.

It's apparent that some people are unable or unwilling to read the early warning signs and take heed......only responding when disaster is on the verge of overtaking them and it's too late to do anything about it.

It's clear to me that Circuit City, Linens and Things, and Mervyns, are the canaries in a coalmine signaling worse things to come. For those unfamiliar with the expression "canary in a coalmine"- it dates back to a song made by the musicgroup The Police. Just kidding- it goes back much farther than that. In the olden days miners working in caves underground were in danger of dying by breathing in methane gas...which had no odor and was undetectable until it was too late. The miners discovered that canaries were highly sensitive to methane and could be used as a warning of its presence before the levels became lethal for humans. Therefore the miners always took a canary with them when went into the mines as a safeguard. Of course I'm sure there must have been doubters back then when they saw a canary die and dismissed it as something else and not a warning to evacuate.

Unfortunately many people still fail to connect the dots and dismiss the early warning signs, which leaves them entirely unprepared to handle bad news when it arrives on their doorstep. I'd much rather be preparing for a worst case scenario and be pleasantly surprised that it doesn't happen, then not to prepare at all and be caught fllat footed if things really get bad.

Sunday, July 6, 2008

Excuses Come Easy, but Success Takes Effort

I was at work today when a near and dear topic came up- investment possibilities!

The conversation centered on real estate. The declining home prices inspired someone to do some research on buying foreclosed properties. Their plan was to purchase a foreclosed property, fix it up, then resell it , or in his own words, "flip it" for a profit.

My immediate thought was the season for "flipping" is long gone. Other folks in the room mentioned that fact but not enough to completely kill off the idea. Eventually the "plan" was modified to get a foreclosed property, then rent it out until property values rise.

The talk went on for a while while I just listened in until I starting hearing the plan included real estate turning up in 3 - 6 months. I had to chime in that this real estate market has a ways to go (ie much longer than 3 -6 months) before any turn around can be anticipated. Then the conversation takes a unexpected turn....

The person doing all this real estate investment planning now decides that they want to wait until the market bottoms out, and then buy a property.

Soul: How are you going to tell when the market bottoms?
Person: Oh, I'll know. The prices will flatten out and won't go any lower.
Soul: You know there are good deals available now with the proper searching....
Person: Yeah, but if I wait, there will be more places and easier to find.
Soul: I thought XYZ was interested in getting started now? You should join up with him since he sounds like a go getter.
Person: Oh, he's only done 2 or 3 property flips- he doesn''t have that much experience.
Soul: ??...yeah....but that's 2 or 3 more than you.....
Person: (a few moments thinking)....yeah, but I still rather wait.
Soul: Don't you think you'll have more competition when everyone thinks the market has bottomed?
Person: I'm not worried....

My own experience has shown me that the perfect time for entering any market is VERY hard to find. The least you can do is start analyzing the market and get a feel for the home property values as they change but this person believes he can just use internet search engines to look at property values. By waiting until the "perfect" time, one runs the risk that by the time you recognize it, the move may have already started some time ago.
Getting rich is typically not handed to one on a silver platter, otherwise we'd all be rich. It does require some effort and motivation.

Then the talk shifted to making the most out of your home equity, such as if a person has paid off their house, how to take advantage of the built up equity. I mentioned that one way is to take out a fixed loan and then invest that amount in something you believe will have a greater rate of return than that of the loan.

Person: What is your mortgage rate?
Soul: About 5.7%
Person: Do you think you can get a better return on your investments than that?
Soul: Yes, that's why I'm in no rush to pay off my mortgage.
Person: Then why don't you get another big loan on your house and put that in the market too?
Soul: (Feeling a twinge of annoyance but holding it back)- Look, the goal isn't to maximize your risk and put all your eggs in one basket and if something goes wrong, you lose everything. My outstanding mortgage is more than enough.

It became clear to me that some folks are more interested in getting rich quick rather than using sound judgment and planning. If they can't become rich "overnight" they rapidly lose interest and move on and usually wind up doing nothing. Of course they will look at people who have put in the work and effort and are successful and attribute their good fortune to being "lucky" or being at the right place at the right time.

Monday, June 9, 2008

The True Enemy of Wealth and Financial Security

The popped housing bubble and economic downturn is affecting all income stratas of the population...from those who make minimum wage to folks who earn millions. This past week it was revealed that Ed McMahon and Evander Holyfield were facing foreclosure on their multimillion dollar estates.

Now the fact that even millionaires are facing an income crisis should be a wake up call to all who think that just earning more and more money is the ticket to financial security. As I've mentioned is a prior post, the three most common things you can do with money is either spend, save, or invest it. Actually there is a fourth use as well- giving it away as in charity contributions but for simplification, I'll include that in the spending column.

We may be in an economic downturn with rising prices and a slumped housing market, but all this has been seen before as the market goes though its cycles of boom and bust. Is it more difficult to make or save money now? Yes, but how much you make is really the smaller factor of being financially secure. Most people make the classic mistake of thinking that higher income is the key to wealth and happiness, but they are off the mark....

In order to master your financial destiny one has to realize and accept that the true enemy to wealth isn't how much you earn, but rather how much you spend. We can look at celebrities and scoff at their financial mismanagement and think that if we had that kind of money that we wouldn't make that same mistake. The sad truth is, most of us are just as guilty at the same kind of mistakes. There are people who live in the poorest countries that have to live on less than a few dollars a day. Their time is spent just trying to scrounge up enough food for their family to have one small meal a day. If any of them had even our lower incomes, they would feel as if they've just won a super jackpot of a lifetime. And yet most of us complain that we don't make enough money without realizing the real opportunity we've been given to be blessed by the accident of birth to have landed in a rich country with many opportunities.

I hear people say over and over again about how they wish they didn't have to work and how they dream of retiring rich but they also throw away money needlessly with no concern. They mistake needs with wants.

All we need is food, water, clothing, and shelter. Of those 4 things:

Food: We need basic nourishment- fruit, vegetables and some meat. We don't NEED to eat out at fancy or specialty restaurants on a regular basis and spend many times more to eat.

Water: Water is the essence of life, but we don't NEED to pay $$ for bottled water when it is freely available on tap.

Clothing: Basic clothing is all that's necessary. We don't NEED designer anything that allows a company to charge big bucks just so one can say they are in high fashion or cool.

Shelter: A roof over your head with indoor plumbing and heating is really all we need. We don't NEED fancy houses with ocean views or McMansions that take up so much space.

Outside of the basic groups we have the usual assortment of wants:

1) Apple I-anything
3) Cable/Satellite
4) Cars
5) Misc (Electronic goodies, jewelry, gourmet food, travel, etc...)

Now I'm not saying that anything who partakes in any of these things is a bad wasteful person. I freely admit to also buying things I want in addition to what I need. What I'm saying is that we all need to be aware of the differences between our needs and wants and weigh them against our income. "Wants" involve an extra expense that isn't essential. We all need to know this because of the following:

1) Financial security and wealth depends on how much you save and invest.

2) How much you spend determines how much you can save.

3) You will NEVER achieve wealth or financial security if you spend to the point where you are not able to save.

It doesn't get any clearer than that. When you get your company paycheck, what you do with what remains after your needs are paid for will determine your financial future. As the months go by, is your bank balance growing, shrinking, or remaining the same? Your goal should be to save at least 5% of your income in addition to anything you contribute to retirement accounts. That's a minimum target as the more saved the better, but at least it gives you a line in the sand to measure. Just doing this would put you way ahead of most other folks since sadly, the national savings rate is now negative- meaning people are spending more than they earn. Be strong and be willing to cut back on some of your wants if needed in order not to be part of this group.