Okay, okay, OKAY — good grief! — let’s talk a little about money.
(The first few years, this site was devoted almost entirely to money — but how many times can we discuss whether it makes sense to pay off your mortgage? If you care about money, just read the book, for crying out loud. It’s only ten bucks. Or save fifty cents and read it right now.)
Here are my thoughts on money:
1. Live beneath your means. That sets you up for success. It also allows you to pace yourself because — forgive me if you’ve heard me say this before — a luxury once sampled becomes a necessity. How can you live happily on the second floor after you’ve had an apartment with a view? Happiness has more to do with direction than amount: you want to live a little better each year. How tragic to be 24-years-old with a Bang & Olufsen stereo (I’m still about 20 years away from that) and a hot Mercedes. Pace yourself! “Tease yourself with anticipation. Ease the fingers of your aspiration up the inner thigh of your cupidity. Tickle your fancy. Of course money buys happiness!” — I concluded a Playboy column decades ago — “but both will last longer if you remember the importance of foreplay.”
2. Corollary: live lightly on the planet. That sets us all up for success. Or at least for better odds. The most thrilling thing I’ve done in recent memory was replacing four 100-watt recessed kitchen floods with four dimmable 6-watt LEDs that have been serving just as well. A 94% reduction in energy at no sacrifice whatever. (Yes, the bulbs are expensive; but they are an investment, expected to return many times their cost — a return better than I’d get from buying stock in an electric company. And tax-free.
3. Avoid bubbles. Yes, it’s unwise to try to “time the market.” What do we know that would give us an edge? But every so often an asset class is so wildly overpriced, like tulip bulbs in 17th Century Holland or real estate in 21st Century America, that it is best avoided. The house next to mine that sold for $105,000 in 1998 sold for $740,000 in 2005. Hello. The dot.com bubble of 1999-2000 also springs to mind. Today’s equivalent are Treasury bonds. The price you have to pay for each dollar of interest is amazingly high. Even long-term TIPS are now priced so high it would make sense to sell any you may still own. (When first suggested here, they yielded a ridiculously good 4.25% above inflation. Today, depending on their maturity, they yield either nothing above inflation — or, because they are priced so high, carry a small negative yield). I wouldn’t hold long-term municipal bonds either . . . not so much because I fear default (although there’s that), but because when interest rates finally take off again — which sooner or later, without warning, they may fairly dramatically do — the price you can get for selling them will plunge. And if you smugly note that, by holding them to maturity, you will come out just fine with the full promised $1,000 per bond, I remind you there’s a chance a tube of toothpaste will then cost $1,000.
4. Avoid transaction costs. Mutual fund fees, annuity fees, advisory fees, “full-service” brokerage fees, taxes — as argued more fully in the only investment guide you’ll ever need (ever!), it’s easy to find oneself betting on a horse with a 400-pound jockey, even as equally fit equines support 18-pound jockeys (see the section on “Willow” in my book, where I had a spectacular success at the track).
5. Read #4 again.
6. After you’ve covered all the basics — paid off your credit card debt, secured adequate term life insurance (if you need it), saved up an ample rainy-day fund (in the bank) — and after you’ve picked the really low-hanging fruit (like investing in LEDs and caulking to cut your utility bills by $400 a year, say, at a cost of $1,000, say, for a 40% annual return on your investment, tax-free) — diversify. Some real estate (your home, for starters), some stocks (via index funds), some gold (GLD), maybe a little timber (via PCL or WY). This is a longer discussion, of course — one would need to write a whole book to do it justice (go ahead: read the book) but that’s the overview.
One strategy I like to suggest for the money you want in the stock market is to dollar-cost average most of it into index funds or ETFs (but the right kind, which is to say the equally-weighted or fundamentally-weighted ones, not the market-weighted ones) . . . but to set aside some modest portion as “play money” to be spread among perhaps half a dozen individual securities, many of them quite speculative, for two reasons. First, you’re human: this can be exciting, fulfilling a need that might otherwise be met gambling on something where the odds are much worse. Second, you get to control the tax consequences. If you use your losers to lower your taxable income and your long-term winners either to reap lightly-taxed capital gains or to fund the charitable giving you would have been doing anyway, you can come out ahead even if you only break even.
Of course, you could also do worse. You could lose money. But you also might do better.
Which brings me to a few updates.
Starting with our dredging stock, GLDD, which rests on a premise of sediment. Silt accumulates. Yesterday, the company made a potentially smart acquisition — what? you don’t read Dredging Today? — sending its stock up to $9.50, quadruple the best price I suggested it at, although for much of mine I paid more like $5 and $6 a share. It remains a core holding for me.
Then there was the news yesterday on NPSP, suggested at $6.65 two years ago, $9.15 at yesterday’s close, after which some news was announced. Guru: “The great news for investors in NPSP is that they have priced Gattex at $295,000 and should realize at least $236,000 per patient per year, they have identified at least 1,000 individuals that are immediate candidates, and believe there are at least 3,000 in the US. This price is about 3 x what the analysts had been estimating and will greatly boost their profit outlooks. Models are being updated as we speak. Based on current estimates I simply do not see how this won’t be a 30 stock in two years, 50 in three years.” And I don’t see who can afford, or what health care system can afford, a $20,000-a-month drug. But I’m glad for the 1,000+ people who may be getting it, and hopeful the stock does have more room on the upside.
We have lots of stocks it’s a good thing you bought only with money you could truly afford to lose — what a marvelous job they’ve done lowering our taxable income. But we have a few that have done rather well; and I continue to live in hope for quite a few others.
One of you has put in a ton of work building a spreadsheet to try to quantify the “performance” of this site over the past 16 years. He is now waiting on me to supply some of the information on the more obscure recommendations whose outcomes he can’t assess. That, too, is a lot of work, so I’m not sure when it may all get done. And, of course, “past performance,” even if it turns out to have been positive, “is no guarantee of future results.” But I do hope to get around to it. In the meantime, caulk all the drafty places. Best investment you can make. And tax-free.
Quote of the Day
Beware of little expenses. A small leak will sink a great ship.~Ben Franklin
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