Investing 102

[sik68]

To follow up on the topic of "financing a depreciating asset" from a few days ago, I came across this really good financial blog tailored towards medical professionals. http://whitecoatinvestor.com/

Here is an excerpt that does a good job summarizing the issue.

The problem I have with people financing depreciating assets like cars isn’t so much a math issue as a behavior issue. As you mention, financing $10K at 1% for a year is only going to cost you $100 in interest plus a few hundred dollars in fees (and perhaps a few hundred dollars that you could have knocked off the price by paying cash.) Given your salary, it’s peanuts. Even Suze Orman would agree you can afford to finance this.

The issue I have with it is the habit. First it’s the car, then the house, then some nice vacations, then private college for the kids and before you know it you’re that 65 year old doc still working 15 shifts a month because he has to who seems to detest his patients, has no tolerance for new nurses and overall seems to hate his life. Financing a depreciating asset is by definition living beyond your means. It’s a slippery slope. Knowing you, I doubt you’ll go far enough down that slope to matter, but it’s worth at least recognizing what you’re doing.

- See more at: http://whitecoatinvestor.com/may-i-p....nMh0VmCa.dpuf

Another good article. Cheap financing is just leading people to finance longer, borrowing money for the wrong reasons. 10 Year car loan anyone?


I know we already closed the loop on this, but it's more food for thought.

[64G-lark]

Thanks Greg for taking the time to answer my questions. I will probably have more once I get my feet wet.

[GregWeld]

We've probably never covered SHORTING stocks.... mainly because that's not an INVESTMENT tool.... it's a "trader" tool. Personally -- I never short stocks because I'm not that smart... and there's something fundamentally wrong (to me) to bet that a company is going to do poorly. I'd far prefer to try to buy great companies that I like -- and if the stock hiccups a bit -- buy even more... but we've covered that about half a gazillion pages worth!


SHORTING is borrowing the stock from the brokerage --- selling shares you do not have --- which gives you the cash to your account --- BUT!!! BIG BUTT --- you OWE the shares... so it's called a NAKED SHORT. Now --- if you SOLD the shares at $10 ----- and can buy them down the road for $8... and repay the shares you borrowed... you made a nice profit on the trade. BUT!!! Always the big butt --- if they go UP from where you sold... eventually you're going to have to pay them back... so you could end up buying the shares for $15 and losing your sorry little (or big) butt in the process.

Here's my thing about this. #1 I don't want to go around betting that company X is going to suck. I don't have time to investigate and do all the homework that takes.

#2 -- about the time you think something sucks -- so does everyone else -- and the PROS on Wall Street have all bet the farm shorting the name... Now all of a sudden -- everyone is short --- and something happens and they're all buying like crazy to cover their short position. Guess what happens when everyone is buying.... RIGHT! The shares go UP not down.

Now --- a naked short has unlimited loss potential. In other words there's no stopping the price going UP.... so you're wide open to "whatever". At least if you just outright buy a position ---- and it goes to ZERO for a loss -- you're loss is capped at 100% --- YES -- HUGE loss -- but it's still capped at what you paid.

Below is an article --- on a very smart guy --- that has bet ONE BILLION DOLLARS on a short... and so far he's 100% wrong and his loss can go far higher provided the stock continues to go up. OUCH!

http://www.forbes.com/sites/nathanva...percent-worse/



Now -- there's another way to do a short -- and that's called SHORTING AGAINST THE BOX....

If you OWN the shares already --- and decide to sell some or all of the position "short".... you at least have your short covered because you already own the shares to replace them (basically borrowing from yourself). That's a far better way to go if you decide to be a big shot shorter. LOL

[XLexusTech]

Profit on FB today /.// Holy cow.. in the Green on FB.////

[GregWeld]

Originally Posted by XLexusTech

Profit on FB today /.// Holy cow.. in the Green on FB.////

What a ride.....




Now.... it's still priced for perfection. So you now have to hope that it's on a roll and can keep up the revenues and growth.


I'm not trying to talk anyone into -- or out of -- a holding. But I know that companies like this can be "been there done that" in an instant. When or if the "kids" decide something else is kooler. Poof! They move on like a Chevrolet heartbeat. That's the big challenge with investing in this kind of stuff.


In the meantime -- a guy can hit a home run.... So who knows!

[GregWeld]

Here's a website everyone should be using..... be wary of being "sold" on some stock or another on sites like this.... but many sites have great "tools" which a guy can use from time to time.


This will show you the POWER of DRIP (dividend reinvestment) investing... so if you put in a symbol --- and just choose a time frame (say --- 2003 start and 2013 ending - which is a 10 year period) --- and this will come up with TWO CHARTS.... one (the top) showing you DRIP investing..... the bottom will show you without reinvesting the dividend.

IF you are still 10+ years from retirement..... I'd suggest you check the box that says to reinvest the dividends!



http://www.dividendchannel.com/drip-returns-calculator/

[toy71camaro]

That's quite a nifty little tool.

MO being one of my holdings, i just threw that in there from 2000 to now...

On 10k, with drip = $162k. W/o drip = $69k. Wow. Granted, it doesnt tell you how much cash you accumulated during that time. but still. (unless i missed it)

Good thing i Drip all mine already.

[GregWeld]

Originally Posted by toy71camaro

That's quite a nifty little tool.

MO being one of my holdings, i just threw that in there from 2000 to now...

On 10k, with drip = $162k. W/o drip = $69k. Wow. Granted, it doesnt tell you how much cash you accumulated during that time. but still. (unless i missed it)

Good thing i Drip all mine already.

You wouldn't accumulate any cash -- because all the dividend payout would be used to purchase additional shares.

The key to that is it's an accelerating vehicle... the more shares bought... the more dividend collected...buying more shares... paying more dividend and on and on. That's why it works!

[toy71camaro]

Originally Posted by GregWeld

You wouldn't accumulate any cash -- because all the dividend payout would be used to purchase additional shares.

The key to that is it's an accelerating vehicle... the more shares bought... the more dividend collected...buying more shares... paying more dividend and on and on. That's why it works!

I mean with Drip turned off.. you'd have the dividend payments sitting on the sidelines collecting dust each quarter.

With drip turned on, yes, we're taking the quarterly div payment and buying more shares at the current rate (helping our dollar cost average)..

Now, I wrote that for the general public. I know you know what drip on/off is.. lol

[GregWeld]

Originally Posted by toy71camaro

I mean with Drip turned off.. you'd have the dividend payments sitting on the sidelines collecting dust each quarter.

With drip turned on, yes, we're taking the quarterly div payment and buying more shares at the current rate (helping our dollar cost average)..

Now, I wrote that for the general public. I know you know what drip on/off is.. lol

Yeah..... pretty much....



DRIP investing is a great way to really kick a portfolio in the bee hind.... It will automatically purchase shares for you... so dollar cost averaging is working (buying more shares when the price is low and fewer shares when the price is high).. but it's really the COMPOUNDING affect that works the magic!