Fortune Watch

What works in investing? I don’t mean that question the obvious way-that it’s a place where people buy and sell stocks through brokers. What I mean is how you think stock prices are really set. What is your mental model of how prices are decided?

A flawed mental model can lead to some interesting conclusions. For example, in the early days of email, a friend of a mine believed that if you reduced the font size in an email message, then the message would become smaller and therefore easier to send. It was a flawed mental model, or rather, was the fax mental model being applied to email.

I believe one of the fundamental reasons why so many people have trouble investing in the stock markets is that they have severely flawed mental models of what determines a stock price. While there are many mental models of how the stock markets work, some are more common than others.

This is the most widespread one: ‘There are people who know when a stock’s price is about to rise. If one of them tells me, then I can make money.’ This is the ‘tip’ model of the stock markets. It isn’t so much a mental model as the lack of one. Unfortunately, this is a very common one. There seem to be a lot of people who believe that someone out there knows which way things will move and everything depends on somehow getting to know these secrets.

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Boaters run aground by not paying attention to tides, charts, navigation tools and their GPSes. Investors get swamped with information, media noise, breaking news, politicians, gurus, and derivatives — so much so that they can’t see the oncoming fog banks and tsunamis of cyclical change.

Most investment mistakes are caused by basic misunderstandings of the securities markets and by invalid performance expectations. Losing money on an investment may not be the result of an investment sandbar and not all mistakes in judgment result in broken propellers.

Errors occur most frequently when judgment is rocked out of the boat by emotion, hindsight, and misconceptions about how securities react to waves of varying economic, political, and hysterical circumstances. You are the commander of your investment fleet. Use these ten risk-minimizers as lifeboats:

1. Identify realistic goals that include time, risk-tolerance, and future income requirements — chart your course before you leave the pier. A well thought out plan will minimize tacking maneuvers. A well-captained plan will not need trendy hardware or exotic rigging.

2. Learn to distinguish between asset allocation and diversification. Asset allocation divides the portfolio between equity and income securities. Diversification limits the size of individual holdings in several ways. Both hedge against the risk of loss. Both are done best using a cost based approach.

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Most investors incorrectly think of “risk” as the possibility that the market value of a financial asset might fall below the amount that he or she has invested in the asset. OMG, how could this be happening!

Think about it. The harboring of these misconceptions (that lower market price = loss or bad and/or that higher market price = profit or good) is the greatest risk creator of all. It invariably causes inappropriate actions within the large mass of individuals who are uninitiated in the ways of the investment gods.

Risk is the reality of financial assets and financial markets: the current value of all securities will change, from “real” property through time-restrained futures speculations. Anything that is “marketable” is subject to changes in market value. It is as the gods intended, and portfolios can be designed so that it just doesn’t matter quite so much as you’ve been brainwashed into thinking.

What is abnormal is the hype surrounding market value changes and the hysteria such hype causes among investors. No way should a weak real estate market translate into near zero bank balance sheet entries — it just doesn’t compute, except when it is popular politics.
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Debt has become a major issue in the life of the Americans. In order to resolve this problem the two most valuable results are either debt settlement company or filing bankruptcy. But before you opt for any one of the above mentioned programs you need to know the advantages and disadvantages that would help you to choose the right kind of plan that would suit your pocket.

Determine the depth of your debt:

1) Demand a copy of your credit report from the credit card companies.

2) Recheck the information provided on the statement of the credit card companies. Search for any incorrect entries regarding personal information, account which are not liable to you and even accounts which are actually paid in full but showing an out standing balance.

3) Keep a record of the credit score which is also known as Fair Issac Credit Organization (FICO) score. FICO has been named after a software that calculates the credit score. The average FICO score on the ascending side is 500.

4) Add up all the balances that are due from your credit accounts, loans, both the secured and unsecured loans and also include the collection account.

All these information would help you to decide to make a choice between a debt settlement program and filing for bankruptcy.
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Weekend Humor

What is the first thing that almost any personal finance blogger that tends to align themselves in “Camp Frugal” will tell you when it comes to saving money? Most likely it is a variation of the mantra, “Spend less! Save, save, save! Quit spending money!” Is this really the best way? It seems that many people, myself included, can leave an important variable out of the cost saving and wealth maximizing formula. This “missing variable” is opportunity cost.

Opportunity Cost Explained

What exactly is opportunity cost? Let’s say that you have two different things that you could do with an hour of your time: Activity A or Activity B. You can only choose one of them but not both. If you choose to do Activity A then you cannot do Activity B and vice versa. If Activity A is your #1 choice for what you would choose to do for that particular hour and Activity B is your #2 choice then when you choose to do Activity A, and are therefore excluded from doing Activity B as well because remember you can only choose one or the other, your opportunity cost is the cost to you in not being able to partake in Activity B.

The technical definition of opportunity cost is therefore the cost of the next best alternative (the thing that you have given up) whenever you are making a decision between two or more mutually exclusive choices.

It’s important to remember that opportunity cost is not necessarily always measured in financial terms (although it is a smart thing to do to ultimately convert all opportunity costs into a financial measurement so that you can better compare options).

Let’s take a look at some different scenarios to see if strictly adhering to the “Spend Less” rule in all circumstances is the best way to go or if there are times when taking a closer look at the opportunity costs involved might help us to improve upon our cost savings and wealth maximizing “formula” and ultimately create wealth and skyrocket our net worth even faster.
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Try a budget to keep yourself out of financial trouble!

Draw up a budget? What a mad suggestion. The average reader will find his eyes glazing over at the mere thought of something as hideous as drawing up a budget. That’s surely an activity reserved for geeks and weirdos.

And that’s the problem isn’t it. Most people don’t consider budgets a big issue. They will gladly perform a myriad of tasks daily that bring structure to their lives. Set the alarm clock. Munch through some horrid tasting cereal because it’s good for the digestion.

Get to work to perform boring and monotonous tasks. Live daily life in a totally structured manner until very few minutes in the day are available for spontaneous experiences. Yet, something as structured and necessary as a budget is frowned upon.

A budget provides the basic information to allow spending decisions to be made. Most people have a set income with which to work. It is only the monthly expenses where some control may need to be enforced.

It seems an almost impossible task for the average person to be able to work out what is left over after all set expenses have been deducted. Yet it is hardly a skill requiring an Einstein type of mind.

Fill in the amount coming in every month and deduct all expenses that come off every month such as mortgage repayments or rent, motor vehicle instalments or transport costs, costs of services such as electricity and gas and an allowance for food.

Don’t forget to allow for annual deductions such as licenses and memberships or pleasurable items such as holidays. The rest is available for arbitrary spending or saving.

This calculation seems to be beyond most people’s capability. In fact women in particular seem to roll their eyes in despair, fish out their credit card for some retail therapy and leave the bank account to look after itself.

So for the New Year’s Resolution number 2 in 2010 compiling a budget every month could be a novel experience. For those who find self-discipline a problem, putting away those credit cards, cancelling the bank overdraft could be a method.

Stop spending money when it runs out during the month. During the first few months it might even be necessary to eat with parents and friends. Making the drawing up of budgets a habit could be the best Resolution anybody could bring on board.

For those people with complex income structures and diverse expenditures a budget might need to be prepared by an accountant. Whatever the set-up, it is not an impossibility. It could certainly have helped such celebrities as entertainers Burt Reynolds and Mickey Rooney, Willie Nelson and Jerry Lee Lewis.

Industrialists such as Henry Ford and Henry John Heinz has similar fate befall them. Even Donald Trump mismanaged his budgets. Mind you, Donald Trump would probably not have been helped with a budget!

For Joe Average though a budget is a great tool to help with keeping their financial boat on an even keel. Try it in NOW.

Living in mansions and driving BMWs was never my passion. But right from my childhood I wanted to be rich enough to fulfill my small but expensive desires like having a Rolex watch on my hand or drive in a Toyota Camry. But as I grew and saw the world advancing, I slowly began to understand the meaning of a very old saying that “only if you aim for the sky, you will land among the stars.” And that applies for almost every living soul on earth.

Becoming a millionaire is one dream that people see with open eyes and spend their life toiling to reach their goal of being counted amongst the rich people of the world. There are those who succeed, but many are pulled back by the others in the race. But there is an interesting intermediary class of people who the world calls the ‘pretenders’. Any guesses why? Because no matter how hefty their debts are, they never compromise on their social status. But here is a piece of advice for such people, “Stop Acting Rich . . . and Start Living Like a Real Millionaire.”

A former university professor and the co-author finance books like “The Millionaire Next Door”, Thomas J. Stanley has once again shared his experience of examining the truly rich people in his book, “Stop Acting Rich . . . and Start Living Like a Real Millionaire.” (Wiley, $17.79). The author highlights that the credit, recession and crisis have presented us with the opportunity to treat and cure the pretenders.

“For the treatment to work, you must take a cold hard look at your balance sheet and at your life, and determine if you would be wealthier if you would stop acting rich,” he writes.

Stanley has bought very interesting facets of the life of real millionaires and the ones trying to emulate them. He points out at the major difference between the income and net worth and explains what counts to be a true millionaire. Some quite intriguing findings of his study include:

• 86% percent of all prestige or luxury makes of motor vehicles are driven by people who are not millionaires.
• Typically, millionaires pay about $16 (including tip) for a haircut.
• Nearly four in 10 millionaires buy wine that costs about $10.

His only aim behind the research is to make people aware of a very simple truth of life that only if people stop acting rich, they would be able to achieve the kind of happiness money can’t buy.

“For the treatment to work, you must take a cold hard look at your balance sheet and at your life, and determine if you would be wealthier if you would stop acting rich,” he writes.

The realistic book will help people get closer to reality, that pretending will never bring contentment or the real joy. Only accepting the fact that acting rich is far away from actually being truly wealthy will help them find the bliss of happiness.

Just before Christmas scores of people feel compelled to write lengthy articles, present lectures, compile videos for YouTube and in general create hot air about the topic of excessive Christmas gift buying.

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Some pontificate about this subject throwing clever economic theories about and others tug at emotional strings while further proponents try to reason that Christmas gifts are a waste of money because most people hate the ones they get.

They certainly have a point. The shopping malls hum at their busiest just after Christmas when people come in to exchange their unwanted gifts.

So why do it?

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Easy answer really. It’s all about guilt. Parents showering their children with gifts do this because they feel guilty that they don’t show their love and caring enough. Adult children give gifts to parents because they feel guilty that they don’t show their love and caring enough. Husbands give their wives gifts because… You get the drift of the argument here.

If this is the reason for the excessive gift season, how did it get so out of hand? Enter the advertising industry whose reason for existence is to ensure their clients sell more and more products.

Holidays based on emotional reasons such as Christmas, Valentine’s Day, Father and Mother’s Day, Teacher’s Day and most other man made public holidays are an advertising executive’s wet dream.
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Emotions and message. They work so well together. If you love your kids, parents, friends, auntie and any other folk you can think of then you have to buy that latest game, just launched designer label perfume, bit of jewelery or that cute little Ferrari.

The bigger the purchase the more perfect is your love. Not always of course. Sometimes   it’s the latest toy that causes the most obsessive gift purchasing quest. Many parents have felt compelled to shred their nerves chasing around the shopping malls to find that last Nintendo game, most recent Bratz doll or zebra striped iPod.

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For many businesses this period of gift feeding frenzy is the main income generating quarter. This is what keeps them going. Sure there are other times during the 12 month trading period where the flat-lining turnover figures show a blip of life, but it’s the Christmas trading period that provides the bulk of their trade.

Florists have a similar love relationship with Valentine’s Day. And chocolate manufacturers have jumped on the bandwagon of Easter for their rush of income. So why should shopping malls not similarly pursue the Xmas dollar.

That’s exactly what shopping malls are doing with great gusto. How else would it be possible for you to find the biggest decorated Christmas tree in an Arab country? And have you noticed how early in the year those Christmas decorations are put up and the cheesy jingles are played? October already.

In the end it’s truly a win-win situation. Business makes its money. Human beings get to calm their guilt feelings about how the stress and busyness of their lives forces them to neglect their friends and family during the year.  It’s a season of goodwill to all folk all round.

What is your take on this seasonal topic?