April 2010

Rising markets require GREED CONTROL just as surely as falling markets demand protection against FEAR — the two heads of the “ole” Uncertainty Monster!

While the media and your buddies drool or cringe, respectively, your Working Capital focus keeps you on target, looking for higher yielding, quality, income securities and/or quality equities that have fallen from grace with the Market. Remember that Smart Cash is only “smart” if it doesn’t burn a hole in your Asset Allocation.

Knowing that excessive cash is the result of profit taking should encourage investors to avoid the purchase of high priced old favorites, hot new issues, and the best performing funds. When the FEAR head is talking to you, The Working Capital Model will be whispering in your other ear to get that Equity Allocation back where it belongs with lower priced quality issues — possibly the same ones you recently sold for profits.

I know of no other Investment Manager anywhere (other than those who have contacted me and obtained my consent), private or public, that uses The Working Capital Model to direct individual investor portfolios — certainly none of the major operators, who are dependent for their survival upon the whim of even larger “others”.
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The Asset Allocation formula is the mission statement that defines the long term structure and nature of the portfolio. By simply stating, for example, that the portfolio is to be 70% invested in equities and 30% in fixed income, an investor has proven that: (1) he has analyzed his personal situation carefully and, (2) determined that this structure is most likely to achieve his long term goals.

Asset Allocation is often misused and abused in an effort to superimpose a valid investment planning tool on speculation strategies that have no real merits of their own. For example, “annual portfolio repositioning”, “market timing adjustments”, and shifting between Mutual Funds. To be effective, Asset Allocation must be implemented as an on-going process that is to be tended to with every investment decision.

The Asset Allocation Formula itself is sacred, and if constructed properly, should never be altered in any respect due to conditions in either equity or income markets. Changes in the personal situation, goals, and objectives of the investor are the only issues that can be allowed into the Asset Allocation decision making process. It operates above the whims and cycles of the markets — Income or Equity.

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President Obama signed a legislation last year that brought around many changes to the Credit Card companies and users. Starting early this year, the credit card companies need to comply with a new set of rules. From now on, credit card companies cannot raise interest rates on purchases you already made on your existing balance. The bank won’t be able to charge you for spending more than your credit limit any more. The credit card bills will be more user-friendly, with the payments due on the same day each month and the consequences of paying just the minimum monthly payment clearly printed on it.

From now on, banks will need to send you a minimum 45 days prior notice before raising cash advance and late fees. Mandatory fees (like the annual or application fees) should be less than 25 percent of the credit limit, a rule that puts an end to the credit card company’s pursuit of people with poor credit histories.

The new rules are going to make it increasingly difficult for students to get credit card. For a start, no one under the age of 21 can get a credit card unless they have a co-signer or offer substantial proof of their ability to repay the debt. This move assures that no irresponsible student ends up having a large loan on his credit card without any means of repaying it. However, there’s one fee that has not been curbed, in spite of drawing serious flak from numerous customers for over a decade. Of course, we are speaking about the foreign transaction or currency conversion fee, a fee that earns several million dollars annually for the credit card companies.

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A disappointed salesman of Coca Cola returns from his Middle East Assignment.

A friend asked. “why weren’t you successful with the Arabs?”

The salesman explained.

When I got posted in Middle East, I was very confident that I would make a good sale pitch as Coca Cola is virtually unknown there. But, I had a problem I didn’t know to speak Arabic.

So, I planned to convey the message through three posters.

First poster: A man lying in the hot desert sand….totally exhausted and fainted.

Second poster: The man is drinking our Cola….

Third poster: Our man is now totally refreshed…..

And then these posters were executed all over the places…”Then that should have worked!” Said the friend.

“The hell it should have!?” Said the salesman. “Didn’t realize that Arabs read from right to left”.

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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Weekend Humor

I just knew he’d bounce back! Talent is Talent, Can’t hide for long and he is still a good investment.

During every correction, I encourage investors to avoid the destructive inertia that results from trying to determine: how low can we go; how long will this last? Investors who add to their portfolios during downturns invariably experience higher market values during the next advance— particularly if they focus on Investment Grade Value Stocks (IGVS).

IGVS valuations have been trending upward for nearly a year; Market Cycle Investment Management portfolios are eclipsing the all time highs achieved in 2007, and income Closed End Fund values have risen with surprisingly high yields still intact. The investment gods are smiling once again— but not on everyone.

Corrections are as much a part of the normal market cycle as rallies, and they can be brought about by either bad news or good news. (Yes, that’s what I meant.) Investors always over-analyze when prices become weak and over-indulge when prices are high, thus perpetuating the “buy high, sell low” Wall Street lunacy.
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