Invest Smartly

Investing – Review of USAA Ultra Short Term Bond Fund (UUSTX)

June 14th, 2011

My basic investing thesis is this: The stock market is a scam and interest rates are too low.  So what is an average retail investor such as myself to do?  I don’t want my money sitting around earning 0.01% in a money market fund and I don’t want everything locked up in certificates of deposits.  Stocks were cheap back in 2009, but seem way over valued now.

The answer I found was to invest some money in a short term bond fund.  If you are not familiar with how bonds work, it is important to know a few basic things:

  • A bond is basically a loan between someone with money and someone that wants it
  • Basic bonds need at least three things:
    • A specific amount borrowed (the “face value”)
    • A set maturity date, or for how long the money is borrowed
    • set interest rate (known as the “coupon rate”)
  • Generally speaking:
    • The longer the term of the bond the higher the interest rate
    • This is designed to compensate the lender for the risk of default and the risk of inflation
  • The value of a bond however can fluctuate over time as the markets perception of default risk and inflation risk changes

Knowing the above is useful, but the most important thing to know is that the price of an existing bond changes inversely to the rate of interest it pays.  That is to say, as interest rates go up, bond prices go down.  This is very important for investors in bond mutual funds and ETFs as the NAV or share value of the fund will go down as interest rates go up and vice-versa.

Since I believe interest rates will rise (or at least they should, if Ben Bernanke would stop kicking the can down the road and making things worse) I do not want to own long-dated bonds.  That is because these bonds will drop in value faster and further as rates go up than will short dated bonds.

Fund overview

In my search for a suitable investment, I started looking at short term bond funds.  The problem I had was that most funds that claim to be “short term” actually had average weighted maturities of 3 to 7 years.  That was way to long for my tastes.  Additional, the rate of interest they paid was in my opinion simply not high enough to offset the risk of future inflation or default risk.  Continuing my search, I came across a relatively new fund: The USAA Ultra Short-Term Bond Fund.

Why I like it

I like this fund for a few reasons:

  1. It’s USAA and they have always been an excellent company to deal with and I have never had a problem with anything they have sold me.

  2. The objectives of the fund align nicely with my outlook and goals:

    “Today’s low interest rate environment and concerns over possible future inflationary pressures have left investors searching for investment alternatives. Maximizing income and yield with share-price preservation remains a challenge for many investors. Therefore, in order to provide a solution for our members, we decided that now was an appropriate time to introduce the USAA Ultra Short-Term Bond Fund into our fund family lineup.”

  3. The fund will at least 80% of its assets in bonds with durations of 18-months or less

  4. During the new funds introductory period, it has a reduce management fee which is just 0.60%
  5. The performance is has been better than a savings account, with a year-to-date return of 1.27%


Risks to consider

Like all investments, this one includes risk.  The price of the fund could drop if interest rates rapidly.  The fund could also be mismanaged or have large defaults, both of which could reduce the share price.  Because the fund invests in short term bonds, the interest rate risk should be reduced.

Be sure to read the prospectus before investing.


Important Note: This fund is not FDIC Insured and is not Bank Issued, Guaranteed or Underwritten.  This fund may lose value.  Investing in securities products involves risk, including possible loss of principal.  As interest rates rise, existing bond prices fall.

Disclosure: I own this shares of this fund and contribute to it monthly via an automated savings plan.  Invest at your own risk.

Apple Wises Up and Changes Subscription Content Model

June 13th, 2011

Nice Apple - Photo by: Stefan GustafssonLast week, I posted an article about 7 fundamental headwinds facing Apple stock (AAPL).  In point number #6 I noted:

Openness – This is the classic and often opined Achilles’ heel of Apple.  At it’s core (pun intended), Apple is a closed company.  They want to control everything.  They want to control the hardware, the software, the experience and now most importantly the market place (iTunes / App Store).  Apple lost the desktop PC battle to IBM and Microsoft because of this mindset.  Now they risk losing the phone and non-PC device market to the likes of Google for the same reason.  Android is open, very open.  Amazon even introduced a competing App Store.  Where there is openness, there is competition.  Competition drives down prices, increases quality and sparks innovation.  On a long enough timeline, Apple will lose this battle unless they change their ways and embrace a more open approach to growth.

Apple’s original policy on subscription content was a prime example of this lack of openness.  However, less than a day after my post, in what I am sure is pure coincidence 🙂 , it was reported that Apple had quietly changing their App Store subscription content terms!

Here is the old policy:

11.13 Apps can read or play approved content (magazines, newspapers, books, audio, music, video) that is sold outside of the app, for which Apple will not receive any portion of the revenues, provided that the same content is also offered in the app using IAP at the same price or less than it is offered outside the app. This applies to both purchased content and subscriptions.

Here is the new policy:

11.14 Apps can read or play approved content (specifically magazines, newspapers, books, audio, music, and video) that is subscribed to or purchased outside of the app, as long as there is no button or external link in the app to purchase the approved content. Apple will not receive any portion of the revenues for approved content that is subscribed to or purchased outside of the app

This is a pretty big change and shows that there may actually be some hope for Apple in the long run to truly compete with the likes of Google, Amazon and Microsoft.  Regardless, they still have a long way to go when it comes to software, hardware and other policies before I believe they are full embracing openness as a strength instead of a weakness.

Photo Credit: Stefan Gustafsson

Apple Reverse Course on In-App Subscriptions | MacRumors

Apple stock, look out below?

June 8th, 2011

Apple Head WindsIs Apple an exceptional company with great products?  Yes.  Does that mean it’s stock price will go up forever?  No.  If you are an investor in Apple Inc (AAPL), you have experienced tremendous gains over the last couple of years.  The stock is up more than 350% since January 2009 and has been the toast of Wall Street every step of the way.  It is a favorite of analysts, hedge funds and money managers the world over.  People are bullish on the company and the stock.  There are calls for Apple’s share price to go to $500, $1000 and well beyond.

In fact it is this incredible bullishness that has me the most worried about the stock and if you are an investor in Apple you might want to be worried too.  We here at Below Your Means are not fans of “buy and hold”, we believe more in buy and watch.  Prudent investors (not traders) need to always be mindful of the every changing fundamentals of the companies and assets in which they invest.  It is with this, that I humbly present:

7 head winds facing Apple:

  1. Everybody that wants an Apple product has one – I think this one speaks for itself.  There is an old saying “invest in what you know” which basically means, when you like a product and your friends like a product and everybody is buying the product; you should buy the stock of the company that makes that product.  Several years back, this was very good advice with regards to Apple.  However as I look around today, literally everybody that I know who wants an iPad, iPhone or likewise has one.  The market for trendy high-end “i” devices appears saturated, at least with in my family and circle of friends.

  2. Competition – Apple is an extremely innovative company, the iPhone, iPod and iPad as well as Apple TV and iTunes have changed the industry.  Apple is good at change.  What it is not good at (at least historically) is taking advantage of that change for the long haul.  Competition is all around.  Android-based phones are now handily outselling iPhones and have been for some time now.  Android based tablets are also starting to shine and by Christmas this year, Android-based tablets will more than likely be outselling iPads as well.

    It’s not just phones and tablets.  Microsoft is making a big push into TV with its newly announced Xbox Live TV and Google TV has already been in the market for a while.  iTunes is also under attack from big players such as Amazon, which is already under cutting prices for music with $0.69 new releases.  For more on the threat from Google go here:

    Google’s excellent execution on the Android Platform | Boom Bust Blog

  3. Margin Compression – Margins are the difference between what something costs to make and what that thing can be sold for.  A company gets to keep the “difference”, which is represented as their profit margin.  With the cost of pretty much everything going on up and competition + a slow economy keeping prices down; the result is the profits Apple enjoys today may not be there tomorrow.  This is especially bad for a company like Apple that relies on cheap labor and raw materials as well as high prices to give them the fat profit margins they have enjoyed in recent years.  But wages are rising rapidly and the cost of raw materials is sky rocketing.  This actually has been showing up in Apple’s recent numbers with gross margins dipping to between 38% and 40%, from last years 40% to 41% range.

    In addition, as Apple tries to compete with lower cost competitors (whose quality is also rapidly increasing), it will have to cut prices, lose market share or compete head on in the “low cost space”.  None of these things are good for Apples margins and none of them are things Apple is historically good at.  For more on how Google is going to hurt Apple’s margins go here:

    How Google is looking to cut Apple’s Margins | Boom Bust Blog

  4. Law of large numbers – In investing terms, this one is pretty simple.  If your are a company with $1 billion in revenue and your share holders expect you to grow by 10% next year, you only have to generate an additional $100M in revenue.  If however you earn $65 billion in revenue and your shareholders expect you to grow 10% next year, you need to generate an additional $6.5 billion dollars in revenue.  That’s a lot of money and represents an insane amout of growth to “move the needle”.   That is just with 10% growth expectations.  According to Yahoo Finance, analysts are looking for revenue growth of 58% this year and 21% next year.  That means they need to sell, $104 billion this year and $120 billion next year.  I don’t want to say this is impossible, but it certainly isn’t easy.  Especially with a slowing economy.

  5. Cash – Apple is sitting on a massive amount of cash.  This currently stands at around $50.8 billion.  Many retail investors see this as a good thing, however if you think about what this means for a minute you will see it may not be as rosy as it would seem.  First, Apple is not alone with having a big cash pile.  Microsoft has $50b, Intel has $12b, and Google has $36b just to name a few.  So this isn’t really an “advantage”, since everyone has it.  Second, the reason a company like this has cash is because it generally doesn’t know what to do with it.  Put simply, they aren’t innovating fast enough and they don’t see innovate companies or ideas they want to purchase or invest in.  So they simply sit on the cash.  This is a sign of the companies’ innovation machine slowing down.  Microsoft suffered from the same thing, many years back and the result was a large one time cash dividend to investors, increase in the companies dividend and a shift of Microsoft from being a growth stock to more of an income stock.

  6. Openness – This is the classic and often opined Achilles’ heel of Apple.  At it’s core (pun intended), Apple is a closed company.  They want to control everything.  They want to control the hardware, the software, the experience and now most importantly the market place (iTunes / App Store).  Apple lost the desktop PC battle to IBM and Microsoft because of this mindset.  Now they risk losing the phone and non-PC device market to the likes of Google for the same reason.  Android is open, very open.  Amazon even introduced a competing App Store.  Where there is openness, there is competition.  Competition drives down prices, increases quality and sparks innovation.  On a long enough timeline, Apple will loose this battle unless they change their ways and embrace a more open approach to growth.

  7. High Expectations and recent weakness – While a few days action, does not a trend make.  The price action of the stock in the last couple days / week has not been very good.  Apple’s stock has dropped from $352 to $332 in in under a week.  This is despite announcing new products at its 2011 developer conference.  Traditionally, new product announcements have been a boom for Apple’s, sending its stock price screaming higher.  Perhaps this sluggishness in the stocks price shows how high investor expectations really are.


A few of the items I mentioned above were also mentioned in this article over at Business Insider: The 5 Big Problems with Apple’s Stock.  However, the article is incredible bullish as each “problem” is simply a tee-up for some analyst to say everything is roses and essentially will be forever.  I do not want to sound overly bearish on Apple’s stock, but I do think prudent investors should consider protecting their profits in Apple, should the stock continue to tend down.

For an excellent write up on Apple P/E ration and more head over to Seeking Alpha: Zaky: Apple’s P/E Ratio Falls to Lowest Level Since Financial Crisis Despite 92% Earnings Growth.  Andy Zaky, published another really good read yesterday at Seeking Alpha:  Apple’s Valuation: The One Article Every Investor Should Read


Full Disclosure: I have no position in Apple (AAPL) and do not plan on taking any.

Apple market cap now greater than MSFT + INTC combined

June 6th, 2011

With Friday’s close leaving Microsoft (MSFT) down 1.45% to $23.87 and Intel (INTC) down 1.38% to $21.78.  The total combined “market cap” or market capitalization of Apple (AAPL) is now greater than that of Intel and Microsoft combined.  (Market capitalization is a measure of what all outstanding public shares of a company are worth.)

With a market cap of of approximately $317.6 Billion, the market is telling us that Apple is the second most valuable company in the world, second only to the oil giant Exxon Mobil (XOM).

The article notes:

With the Worldwide Developer’s Conference fast approaching (June 6th-10th), it would appear that Apple has nowhere to go, but up. As a result, according to Yahoo! Finance, the current market cap for Apple is $317.54 billion USD. Additionally, Yahoo! estimates that the 1 year estimated stock value per share will be at $448.33.

No doubt, the author is pretty bullish on the stock.  And why shouldn’t he be? After all, analyst James Altucher thinks Apple’s will be the worlds first $1 Trillion dollar company.  You can see this video here:

This same analyst is so confident and bullish, he actually raised his estimate again, not even 2 weeks later, to $2 trillion.

In the same video, he actually says $3 trillion is reasonable.  Your take is that if and when Apple’s stock does hit $1000, it will not be because Apple is able to sustain 90% year over year ad infinitum, but because the value of the US dollar will drop by 50% or more in the future.  If a dollar is worth 1/2 of what is today 5 years from now and nothing else changes at Apple, there is no reason the stock price won’t be $700 or more in nominal terms.

Regardless, I recommend Apple investors proceed with caution and consider setting some stop orders in place to protect any gains they have realized in the last couple years.  After all, the market may be due for a correction.


Apple surpasses Microsoft + Intel in market cap |

Time to Get Another Bubble Started?

June 6th, 2011

On Thursday of last week we commented briefly on the announcement that Groupon has filed for an IPO.  It has not taken long for folks to start asking the bubble question.  We’re glad they are – between the first tech bubble, the housing bubble, the possible education bubble and other smaller bubbles in between (commodities, etc.) the US economy seems to be a little too bubble driven for our liking.

Chunka Mui over at sees Groupon Hysteria.  His argument is that the IPO only makes sense if you look at it the context of a bubble:

The simple rule about market bubbles is to get in and out before they pop, and by that standard the news that Groupon is moving towards an IPO makes all the sense in the world. The same is true for Facebook, Twitter, Zynga, and the other social media darlings of the moment, as well as for the lesser known companies that are talking to bankers at this moment in hopes of sharing in the frothy “comparable” price umbrella that is forming.

and, like all bubbles, this one is accompanied by the argument that the irrational pricing is, indeed, rational:

Fueling the rationalization for the current exuberance, as opposed to the last tech bubble’s irrational exuberance, is the argument that, this time, it is different. Investors are buying into real profits and sustainable business models, the argument goes, rather than investing in just eyeballs and greater share in markets with as-yet-to-be-defined revenue models. Microsoft’s $8.5 billion acquisition of Skype and, now, Groupon’s IPO filing should give pause to those who might accept this line of reasoning.

Anupreet Das and Geoffrey A. Fowler at the Wall Street Journal are no less concerned, reporting Groupon to Gauge Limits of IPO Mania:

Groupon’s filing comes on the heels of LinkedIn Corp.’s successful IPO, the latest sign of surging valuations for companies connected with hot Internet trends. The size of Groupon’s losses may add fuel to the arguments that investors’ appetite for high-profile tech offerings is becoming overheated, as it did before the first Internet stock-market bubble burst in 2000.
For more, Allison Linn at MSNBC explores various opinions of whether we’re in a bubble or not in Groupon IPO has some wondering about a bubble.

Below Your Means Basics

June 6th, 2011

This month we will be presenting a series of Below Your Means (BYM) Basics articles to help those of you who are new to living below your means, and serve as a refresher for those of us who have (or strive to) live the BYM way.

When you live below your means, you shed a huge source of pressure and strain in your life.  Spending beyond your means, in other words – going into debt – means you are trading your future to get something now.  You are agreeing that in the future you will be willing and able to have a certain amount of money.  But none of us can predict the future.  There are lots of ways people get into trouble with debt.  Accidents and health problems lead to massive medical bills and lost wages.  Your ability to earn can be impacted by layoffs, swings in the economy, your own health, and the health of your loved ones.  Those common tragedies are only one reason to worry about spending more than you have.  In fact, bankruptcy laws are in place to protect people specifically from those kinds of ‘unexpected’ crises.

Money CastleThere is a much more insidious price to pay for living beyond your means.  Doing so assumes that you know now what you will want and need in the future.  In reality, most of us aren’t entirely sure what we want and need today, much less the kinds of opportunities and challenges we’ll face tomorrow.  When you take on debt and fail to save, you narrow the possibilities of what the future could hold.  Want to move to a new town?  You’ll need a job with an income sufficient to pay for your debt, and you’ll need to sell your house before you can buy a new one.  Tired of your car?  You can’t sell it because you owe more money on it than it’s worth.  Have a great opportunity to travel to a place you’ve always wanted to visit?  You can’t take the time off, and you don’t have the money saved up to go.  Hate your job, or worse, discover that your career is unsatisfying?  You’re stuck because your monthly payments are too high to switch to something new.

Saving, on the flip side, acknowledges not only that you need to be prepared for the problems of the future, but that you want to have resources at your disposal to seize the opportunities that come your way.  Want to move to a new town?  Sell the stuff you don’t need, get a few leads on some work if you need them, and get going.  Tired of your car?  Sell it and get something else (or go without).  Have a great opportunity to travel?  Plan a leave of absence and head out!  Hate your job, or worse, your career?  Feel free to get started on the next chapter in your life.

In short, money is a tool that you can use to achieve happiness.  It certainly isn’t the only tool, but it’s an important one.  Using it wisely requires that you know yourself and what makes you happy, and you understand that as you grow and change, your wants and needs will grow and change.  While our site isn’t designed to help you live a deliberate, centered life, there are a few resources we recommend to do so.  Franklin Covey’s The 7 Habits of Highly Effective People, while centered a bit too much on an upper-middle class suburban existence, has a great process to follow to think through what is important to you and how to get there.  And David Allen’s Getting Things Done: The Art of Stress-Free Productivity is such a great way to organize your life that he has spawned what Wired magazine referred to as a cult of hyper-efficiency.  Covey’s book especially can take you to additional resources on how to live a successful, meaningful life, but honestly — whatever helps you discover more about yourself, and how to make good choices, go for it.

This month we’ll explore:

  • The Basics of Tracking Your Spending and Building a Budget: This is the single step with which your journey starts.  Sure, you can cut down on your spending, even significantly, without knowing where your spending is going.  But finance is, at it’s most basic, an exercise in math.  If you bring in more money than you spend, you’re living below your means.  If you don’t, you’re not.  Tracking your spending isn’t everything when it comes to living below your means, but it’s hard to be successful without it unless you institute an all-cash system.  Fortunately, there is a whole industry building computer software to help make it simple, and some of it is free.
  • The Basics of Debt and Savings: Debt means giving up opportunities in the future for a lifestyle today.  It is a very dangerous gamble.  You will also see how to use debt as means to manage your cash flow and take risks to increase your wealth.  If you have consumer debt now, you’ll need to first and foremost – stop digging the hole deeper!  Next, you’ll need to pay that debt off as soon as possible and free your future from the tyranny of your past decisions.  Savings, on the other hand, gives you freedom.  It means you have protection from the unexpected and resources that you can use to seize opportunities.
  • The Basics of Spending Wisely: Tips and tricks for spending the least amount possible on things that aren’t critical for happiness and health.
  • The Basics of Living Richly: Spend your money on things that bring you true satisfaction and happiness.  Spending as little as possible for everything else.  Knowing the difference isn’t always easy, and we focus on tools and techniques to help you get there.  To start, realize that most millionaires are ordinary people who live modestly.  And, as this study shows, money doesn’t necessarily bring happiness beyond a certain income.
  • The Basics of the Investing Smartly: Keep tabs on the economy and investing opportunities.  While we aren’t a strict investing site, nor are we financial advisers, we do report on happenings in the economy so you can make educated decisions about where to put your hard-earned savings.  We also believe that, like personal debt, government debt is very risky and the government’s inflationary and spending policies are significant risks to personal well-being and to our country’s future.
  • Common Pitfalls: Identify common pitfalls on your way to financial independence, and share the stories of people who share your commitment to living well by living below their means.


Thumbnail Photo: Blocks 1 by Crissy Alright

Story Photo: Frits Ahlefeldt-Laurvig

Is the market about to correct?

June 3rd, 2011

We here at Below Your Means are not stock traders, however we believe strongly in investing smartly and being prudent with your hard earned money.  Protecting the money you have invested (known as protecting your capital) is key to the long term accumulation of wealth.

While I don’t pretend to be an expert stock technician and chart expert, I can look at a chart and draw a basic trend line.  If you believe in technical analysis at all, the following chart should definitely give you some pause:

SP 500 Trend Line Broken June 2011

The chart above shows a basic trend line of the S&P 500 since it hit the infamous low of 666 in March 2009.  This trend was “tested” in August of 2010 and today appears to have “broken” (meaning stocks closed below the trend line).  In trader terms, this could just be a “head fake” and we could head higher from here.  However, that trend line will now be considered “overhead resistance” and it looks like stocks could be getting ready to “correct” (an other trader term for “go down 10% or more”).

If you have read our 7 tips every new investor should know, you know I personally do not generally believe in the classic “buy and hold” approach to investing.  Instead, I prefer to hold onto quality assets and protect my gains (sell) should the market look to be rolling over.  If you were lucky enough to buy stocks in March 2009, or any time since, you are probably holding some solid gains.  Now might be a good time to consider locking in those gains and see what happens.

If this is indeed the start of a correction, an S&P 500 price of 1050 would be a logical place for it to stop.  That’s a solid 20% drop from here.