Archive for May, 2011

Frugal Fail: $131k for a funny looking hat

$131k Princes Bietries Hat is sad


If this is how trickle-down economics is supposed to work, I fear for the future.  With the distance between the haves and have-nots at historic highs, unemployment rising the world over, governments falling across the Middle East, protests and riots in Spain, Greece, and others EU countries, and banks the world over continuing to be bailed out on the backs of tax payers; it pains me to see the extremely well-to-do spending $131k for a hat.  It bugs me even more that everyone seems to be placated by the fact that “the proceeds go to charity”.  Well, la-de-da!

CNN reports on the sale here.  The CNN video bit cheerfully ends with – “So much fun to be had, for such a great cause“. This is probably what a CNN anchor would have said had they been reporting on a party hosted by Marie Antoinette.

Marie Antoinette Funny Hat

I am a strong believer in free markets, private wealth creation and the ability of those with wealth to enjoy themselves.  However, bit of tact and social awareness never hurt anybody.

Ok, rant over. 🙂

7 tips every new investor should know

For today’s post, I considered what advice I would give a friend or family member that was in (or just graduating) college and wanted to start investing. This advice comes from the school of hard knocks and is the result of years of investing and trading. I hope it saves you a lot of money by avoiding mistakes I’ve made over the years.

Recognize if you are a trader or an investor


Put simply, investing involves:

  • Looking for undervalued companies, assets or commodities
  • Committing capital to them
  • Looking to benefit from the future success of that investment.

This can be through the distribution of dividends, or the appreciation of the underlying asset or stock. With the exception of protecting your capital via stop losses, your investment timeline should be measured in years.

If your plan is to do anything other than the above, you are a trader. There isn’t anything wrong with being a trader, but you need to understand what you are and what that means.

Buy and hold investing only works when you are getting a really good value


They don’t call it “buy low, sell high” for nothing. If you find yourself “buying high, hope to sell higher” then you are probably not setting yourself up to be the next Warren Buffet. The thing to realize about guys like Warren Buffet is that they were able to buy at or near generational lows and when they did, they bought good solid assets. Those assets were extremely undervalued, and in solid companies with good balance sheets and operating models. A smart investor doesn’t always hold, they watch the fundamentals of the assets in the portfolio. If something in those fundamentals changes for the worse; or the price people are willing to pay for those assets is more than they are worth, a smart investor will sell.

The fact of the matter is that “buy and hold” works best when you buy at or near generational lows and hold for a generation. If in January of 2000, you had bought the NASDAQ at 4700 and held for 10 years, you are still down 40%. If in December of 1989, you had bought the Japanese Nikkei at 38,900 and held for 22 years, you would be down 75%.

N225 10 Year Chart


Don’t be a day trader


If “buy and hold” is one extreme, day trading is the other. During the Internet bubble, any idiot with a trading account could make money… buy any stock at random and sell it weeks later for a 10 to 100% profit. Those days are gone and may people were financially wiped out in the process.

Trading too actively can be equally (if not more) devastating to your portfolio. Being a day trader is expensive. Brokerages charge a fee to execute each trade, this typically can range from $5 to $20 per stock order and $5 to $10 per option trade plus a per option price. These fees are known as “commissions”. If a day traders making 5, 10, 50 trades a day, it is not uncommon for day traders to rack up tens of thousands of dollars in commission charges over the course of a year! If you had a $100k portfolio, and spend $20k in commissions, you have to have a 25% return just to breakeven. Think about that for a second – basically unless you are a walk-on-water trader, you are going to lose money that year. Day traders also don’t generally benefit from things like dividends and long term capital gains. A quick tip, think about how much you trade right now, calculate all the fees you spent last year in trading, figure out how that affected your performance and consider if maybe you are trading a bit too much.


Don’t trade or invest on margin… ever.


The simple fact of the matter is you are not a professional trader and unless you are sitting at a desk on Wall Street and have access to the kind of information they do, you never will be as good, fast or informed as they are. Professional traders not only have the kind of rapid access to information, but they often work at firms that are able to buy and sell in amounts that actually move the market – meaning they have enough weight to fix their own mistakes. You are not them. Don’t risk financially destroying yourself by using borrowed money to try to prove otherwise. I can’t overemphasize this point – I would invest in lottery tickets before I traded on margin.


Don’t invest or trade in things you do not fully understand


This advice sounds simple, but is actually difficult. The reason for this is that the world of investing is designed to be hard. The more confused you are about how things work, the more opportunity for those in the know to make money at your expense. I don’t mean for this to sound like a crazy conspiracy theory – it is simply how the world of investing works. The way large institutions make money in investments is by having access to resources – both money and information – that others don’t. No matter how smart you think you are, you are one of those ‘others’. And it’s not just personal investors that get in trouble here. During the subprime mortgage crisis, pension fund managers and other “professionals” got into plenty trouble with CDOs, CDSs, MBSs, and other complex instruments they didn’t fully understand. Here is a classic example:

  • United States Oil Fund (USO) – This looks and smells like an Exchange Traded Fund (ETF), but it’s actually a Limited Partnership with a stock symbol. This means that if you own it throughout the year, you will get a K-1 at the end of the year. This shows your ownership in the partnership, and as such you have to carry the gain or loss of the partnership onto your tax return.

    USO also invests in oil via futures contracts and as such suffers from having to pay a premium for the time value of the contract, this is known as cantango. To put this in perspective, since January 2009 – Crude Oil is up over 25%, while the USO fund is down about 6%. So even if you were right on the idea that oil was going to go up, using USO to make that bet would have been a very bad investment. You can read more about thishere,here, and here.

There are countless other investment options that look and smell like stocks, but act very different. This includes the VIX, Options, Futures, Currencies and many more.

Avoid inverse and leveraged ETFs like the plague


Repeat after me, I will not “invest” with 2X, 3X or 5X leveraged funds. As an investor, you should never own any inverse or leveraged ETF. Why? Because they are all going zero, just at different rates. These ETFs are designed to be traded and not held for more than a week or even a few days. The reasons for this are many, but the results speak for themselves. A prime example of this is ProShare’s UltraShort Real Estate fund (SRS), also known in trader circles as “the widow maker”. Was there a housing bubble? Yes. Did it pop? Yes. Have home and real estate prices continued to drop? Yes. So in February 2007, was buying and holding SRS a good idea? No.

Since February 2007, the Case-Shiller Home Price Index a wide gauge of the value of US residential real estate, is down more than 31%. In addition, the Moodys/REAL Commercial Property Price Index, is down almost 50%.

In the same time, the real estate inverse ETF SRS, which one might expect to be up 31% if not more 2X that since it is an “ultra” fund; instead is down an incredible 97%. (Ouch)

SRS - The Widow Maker ETF

Many funds like this have performed so badly, that they have had to go through one or more rounds of reverse splits. Where by, as an example, for every 4 shares you own, you get one.

You can read more about this here: Long Term Investors Should Avoid Leveraged ETFs.


Options are useful, but do your homework first


There are literally hundreds of books written specifically on option contracts. Because options are leveraged contracts, the amount of money you can make or lose with them is very high. Options are complex and you have to know the Greeks if you are going to make any money with them. If you don’t know what delta,gamma, theta and vega mean to options, you are not ready to use them. Options, unlike stocks, carry a decaying time component to them, meaning their value changes not only based on price on the underlying asset, but also based on the time left in the contract and the velocity at which the price of the underlying asset is moving.

A few more points on options:

  • Options allow you to get into situations with limited upside and literally unlimited downside. Know this.
  • “Most people that buy options lose money” – This is a fact. The majority of option contracts are written by the big trading firms / market makers. Just realize that you have to really know what you are doing to beat the odds.
  • Stay away from Weekly Expiration Option Contracts – As if the market makers didn’t need another way to make money – enter the weekly option contract. These things are volatile and decay in value very quickly. If you make bets with these, you need to be very right, right away .
  • If you want to get started with options, consider writing “covered calls” – The single safest thing for new investors to dabble in options are with covered calls. This is where you actually own the underlying stock (this is why it is called “covered”) and you sell a call contract (option) to others which allows them to buy that stock from you in the future at a set price. In exchange for this, you get a premium that is yours to keep if the contract expires worthless. These have relatively limited risk, since you own the underlying stock. They also are a potential way for you to get additional “income” from the stocks you are already holding.

    Before you get started though, read all about covered calls and what they mean. There are fees if your call gets “exercised” and if the stock you own drops in price and you want to sell, you will need to buy back the call contracts first.

The world of investing is wide, deep and complex all the way through. I hope the tips above will save you the trouble of having to learn them yourself the “hard way” and will help keep your portfolio sound and growing.



This article is also available at The College Investor blog.  The College Investor was started  to showcase common sense thoughts and ideas for younger investors.

What do the Belarusian Ruble and the U.S. Dollar have in Common?

While currency issues in former Soviet Bloc countries don’t usually make headline news in the main stream media, the devaluation of the currency of Belarus is worth reading about as a lesson in what is happening to the US Dollar.  On Monday, Zero Hedge reported “Belarus Just Devalued Its Currency By 56%”.  Zero Hedge comments:
Overnight 56% drop

At this point, it sucks (that is a technical term) to be holding any exposure in BYR. Luckily for those who held their “money” in the form of gold and silver, they just got an instantaneous 56% value preservation and a relative boost in their purchasing power with just one central bank announcement. Also, any and all indebted parties who have BYR-denominated debts are throwing one big party tonight, as their debt was just cut by more than half.

The change is effective 5/24/2011:
The National Bank of Belarus (NBB) is sharply devaluing the official rate of Belarusian ruble. The exchange rate as of May 24 was set at 4,930 rubles per dollar. A decrease of 56% from the 23 May.
Why should you care about the currency value of a country you probably have never heard of?  First, before you laugh too hard at the Belarusians, consult the following chart of the US dollar:
US Dollar 10 Year Chart
As you can see, since 2001, the US dollar has lost almost 40% of its purchasing power, relative to a basket of other currencies.  So while, our currency devaluation didn’t happen overnight, our central bank’s goals are quite similar to that of The National Bank of Belarus.  To understand what currency devaluation feels like, consider that in the last 10 years the price of oil is up over 400%, gasoline is up over 200%, corn is up almost 300% and gold is up almost 600% just to name a few.   The Belaursian central bank and US central bank are both using currency devluation to deal with massive debt problems. Those of you that have also been following following the bailouts of Greece and Ireland might add that if Greece and Ireland (and soon Portugal, Italy and Spain) were not a part of the EU and still had their own currencies, they would be doing the same thing as Belarus right now.  All of these countries (just like the United States) have massive, uncontrolled amounts of debt.  Debt that simply is too large to ever pay back with tax hikes and spending cuts.  The only real options are to not pay the debt back (default) or to pay it back by printing money (currency devaluation). The first option is deflationary in nature, meaning capital is destroyed and the price of things should decrease.  The second option is inflationary in nature, meaning the price of things will rise.  Both should result in higher interest rates, as investors demand more interest to protect from defaults, or they demand more interest to protect from inflation.  These markets, and indeed the world, is at a very precarious financial cross roads.

Site Update – Facebook

Just a quick site update.  We are now on Facebook.  Since we are new to this, we are not sure what we will be doing on Facebook that is any different from the site, but we appreciate your support and hope you will “Like” us.

We have also added the Facebook web part to our home page and reduced the number of Google Ads on the site.


4% Rebate is back at

It has been almost a month since Prosper offered a 4% rebate to lenders and now its back!  This offer replaces the 3% offer and lasts through May 27th.  This bonus is only good on manual bids in the Featured Listing section.

If you are a potential, borrower – this doesn’t really affect you.  Unless of course your loan gets featured, then it is much more likely you will get funded.  LendingClub members, don’t forget that they too are offering a 3% bonus this month as well.

As always – I want to thank P2P borrower’s for paying back their peer-to-peer loans.  Remember, unlike big faceless banks… P2P loans are funded by your friends, neighbors, co-workers and other honest hard-working individuals.


Personal loan, debt consolidation


May 21 Dooms Day is good business

I personally, do not put much stock in these guy’s May 21st is the end of the world prediction.  But regardless of what you believe, it is hard to deny that doom saying has been good business for the folks over at Family Radio.  CNN Money has a very interest article on the topic: Doomsday church: Still open for business. They point out:

According to their most recent IRS filings, Family Radio is almost entirely funded by donations, and brought in $18 million in contributions in 2009 alone.

That’s big money, they also quote experts that value the company (church), at around $72 Million dollars – funded entirely by donations. This of course, is not the church’s first end of the world prediction.  CNN goes on to say:

Camping first inaccurately predicted the world would end in 1994. Even so, he has gathered even more followers — some who have given up their homes, entire life savings and their jobs because they believe the world is ending.

The article has a lot of other interesting points to read, including how most of the church’s employees don’t believe in the prediction and how the church’s own plans show they are at least hedging this prediction a little.

Frugal Fail: Renting your cable modem is harmful to your wallet


Don't rent a cable or DSL modem

Last month, I replaced my cable modem with a new Motorola SURFBoard 6120 (the same one that I would have rented from Comcast).  I did this because I wanted to take advantage of the new speeds offered in my area and my old DOCSIS 2.0 modem could not handle them.  This and a note from my sister-in-law, reminded of how great of a deal it was to own your own modem instead of rent one.

The following table shows how much money I saved by buying my cable modem 6 years ago.  When I first decided to buy my modem, the rental rate was approximately $3 plus tax.  I purchased my modem online, used it for 6 years and then was able to re-sell it on Craig’s List for $25.  Over that time, Comcast raised the rental rates twice.

Cable Modem rental vs. buy

If I use the same projections, and even assume the monthly rate will never rise (unlikely), I can see that I can expect to save even more money over the next 5 to 6 years after upgrading:

Cable Modem rent vs. buy projections


The main reasons Comcast and others say you should rent from them are as follows:

  • If it breaks, we will replace it
  • You are future proofed, as you get free upgrades as the technology improves

Both of these reasons are ridiculous, but let’s address them one by one.

First, “if it breaks, we will replace it”.  This is simply another way of paying overpriced insurance you don’t need.  Cable modems have no moving parts, this means that their failure rate overtime is very low and that most failures are electrical and will happen within the first year.  New modems typically include a 1 to 3 year warranty and as such, paying hundreds of dollars to “insure” your cable modem is simply a huge waste of money.  Regardless, at approximately $7 to $10 a month in rental fees, even if you have to buy a new modem every year, it is still cheaper to buy than rent one from Comcast.

Second, “you are future proofed and get free upgrades”.  Obviously, since you are paying hundreds more for the privilege of “free” upgrades, the upgrades are anything but “free”.  More importantly, it is critical to know that the standards that cable modems follow known as DOCSIS are only updated every 4 to 6 years.  Once new standards are released, it takes cable operators another 1 to 4 years to fully adopt them and phase out the old standard.  This means that if you buy a modern DOCSIS 3.0 cable modem today, you can expect that this standard will be supported for at least another 5 to 10 years.  To add to this, the current DOCSIS 3.0 standard actually supports speeds many times faster than what the average home internet plan offers, this means that it may take even longer for DOCSIS 4.0 to come out and be adapted than previous versions.

If you are concerned that buying and installing your own cable modem will be hard, don’t be.  The steps are very simple:

  • Buy your new cable modem, I recommend going with the Motorola SURFBoard 6120, as it is pretty much the standard by which others are measured.
  • Un-box it, and plugin 3 wires:
    • Power
    • Cable line
    • Ethernet line to your computer or router
  • Call Comcast or your cable company and tell them you have a new cable modem you just bought.  They will ask you for some numbers on the box and then they will configure it remotely.
  • Return your old modem to Comcast or your cable provider and start saving money.

I looked around online and the best price I could find from a non-fly-by-night company, including tax and shipping was, which has it for $88.24 with free shipping and no sales tax in most states.

You can also get it from here ($89.99, no tax + free shiping):

MOTOROLA SB6120 DOCSIS 3.0 SURFboard eXtreme Cable Modem

Or you can buy it from Amazon here:

For another related frugal fail, consider the somewhat dated story of the widow that paid thousands to rent a rotary phone.  However, before you start to laugh, remember if you are currently renting your cable or DSL modem, you are in the same boat.