Town Hall for Hope Stats

Last night, Dave Ramsey hosted the Town Hall for Hope. It was a great event in which he provided context around what happened to the economy, historical perspective, quotes, scripture, and straight talk. The media can tend to hype things and get everyone down and out thinking the world is coming to an end.

Here are some statistics that Dave shared during the Town Hall for Hope. When people starting talking about how terrible things are, they are good to keep in mind. These are re-posted from http://www.townhallforhope.com/index.cfm?event=displayPostStats".

Gold
* From 1833 to 2001, the compound annual growth rate was 1.54%.
* From 2001 to now, we’ve seen a compound annual growth rate of 15.57%.
* But even with the surge, the lifetime annual growth of gold is only 2.14%.

Foreclosures:

* 50% of United States foreclosures in 2008 came from 35 counties in 12 states.
* 20% of the United States’ population lives in these 35 counties.
* Eight counties in Arizona, California, Florida and Nevada were the source of 25% of foreclosures.
* Existing home sales rose to a seasonally adjusted annual rate of 4.7 million units in February, 2009, and only 860,000 homes were repossessed all of 2008.

The Stock Market:

* Investors have made money 100% of the 15-year periods in the stock market’s history.
* Since 1974, the value of the S&P 500 has grown 1,250%, from 63 to 850.

The Great Depression and Recent Recessions:

* 1938–40: Unemployment grew to over 17%, the Stock Market dropped 89%, and bread lines were real; executives didn’t fly Gulfstreams to Washington, D.C. looking for bailouts.
* 1974: The Stock Market dropped 50%, gas lines snaked around the block, and inflation became stagflation, i.e. inflation in a stagnant economy.
* 1982: Inflation was over 10%, unemployment was over 10%, and the interest rate reached 17% on home mortgages.
* 2009: Unemployment is at 8.5%, there is no inflation, and the home mortgage rate is 4 3/8%. The Stock Market dropped 57%, but it has recently risen from a low of 6400 to over 8000.

Recovery from the Great Depression:

* Those who did nothing recovered in 4 years, 4 months.
* Those who sold out at the bottom realized a 78% loss.

Stock Market Performance Following Recessions:

* 1945–2007: The average bear market lasted 12.7 months with an average decline of 30.3%.

The Beardstown Ladies Common Sense Investing Guide

The Beardstown Ladies Common Sense Investing Guide by the Beardstown Ladies

When you think of your grandma do you associate her with being savvy with the stock market? This group of 16 women aged primarily in the 50 to 80 year old range began an investment club in the early 1980s for the purpose of learning more about the stock market and as a good social outlet. Among the group was a school principal, a secretary, a pig farmer, and assorted other professions.

Some of them had a general understanding of the stock market prior to meeting together and some did not but all of them gained a much better understanding of investing and business in general over the course of the club meetings.

The structure was such that they met once per month to discuss various companies and the pros and cons of investing in them. They used various financial metrics on income statements, balance sheets, and analyst opinions to make informed decisions about stocks to invest in. Each member contributed $25 per month to the club and when enough money had accumulated shares of stock were purchased.

Each member of the group was assigned a company to track and perform research on through various methods such as observing local businesses like Walmart, reading the Wall Street Journal, watching financial shows on television, and the nightly news.

From 1984 to 1993 they claimed to have earned more 23% in the stock market but later audits revealed the actual percentage to be closer to 9%. Regardless of the actual return the women became substantially more knowledgeable about the stock market and much more savvy about investing.

The club also provided them with a great social outlet where they swapped recipes and stories in addition to investing money. Many of these women were widowed and the club gave them a great deal more confidence when managing their finances.

The first half of the book describes the club structure and how they originally started and the second half deals primarily with their investing principles and how they went about selecting stocks to buy, hold, and sell. Interspersed throughout are the ladies personal comments about various investing and other topics. There is also a recipe section towards the end of the book.

This book provides a good vehicle for learning how investing clubs work as well as general tips on growing one's knowledge of the stock market and how to evaluate individual stocks. The beginning investor would do well to first thoroughly research mutual funds and their benefits prior to investing in individual stocks.

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Grande Expectations

Grande Expectations by Karen Blumenthal

Have you ever watched a particular stock go up and down in value in the market and had trouble understanding the rational behind why it moved as it did? In Grande Expectations Blumenthal, a former long time writer for the Wall Street Journal, examines the historically "hot" stock of Starbucks. In it, she examines varying players in the buying and selling of a stock and spends time with each of them to understand why they choose to buy, sell, or hold Starbucks stock. The company had their Initial Public Offering of stock in 1992 and since that time has rocketed in growth.

One clever stylistic portion of the book is the text on the first page of each chapter is tapered in the form of a coffee cup. The chapters are divided by months and Blumenthal examines different things which affected the stock price. One example is an examination of how a price increase in coffee or the introduction of seasonal products affect sales and consequently the stock price. The book is not only a chronological account of the stock's price over the year of 2005 but also delves into the roles of analysts, mutual funds, hedge funds, investment clubs, individuals and varying other investors.

She attends the shareholder company meeting, which is put on as an entertaining spectacle and huge pep rally for shareholders. Additionally, she speaks with CEO Howard Shultz and a number of other executives to understand company strategy and why they do what they do. She also talks with local Starbucks owners and learns about the company's purpose in sometimes having multiple stores within close proximity such as directly across the street.

The stock market prices stocks based on expectations and potential for growth. It rewards companies which consistently produce strong growth and punishes companies when numbers slip even slightly from what its high expectations are. This can be seen in high growth companies who report solid earnings and yet the stock price takes a hit. The market has come to expect extraordinary results and prices the stock as such so when results are simply good and not extraordinary the stock price can fall.

It would have been nice to have seen the stock followed during 2006 so more recent history could have been followed but having a record of the stock's actions during 2005 was also educational. At times the technique of using months as chapter breaks did not seem to work from a literary standpoint. To some degree, we revisited the same characters whether individual investors, analysts, or investment clubs but I would like to have maintained the same cast and visited with them more frequently during the year to better grasp their thinking on actions with the stock. At the same time, the book tried to dig down to understand the various elements involved in why a stock price moves. The book felt like a journalistic style of interview, background, and research which provided a good end product but perhaps could have excelled more if it focused either on the story of how the individuals interacted with the stock or more strictly on the various components of why the stock moves.

Regardless of the aforementioned suggestions, the book provides a great historical and relatively current look at what is becoming a classic company recognized worldwide as well as insight into why a stock price moves as it does. Whether you're a coffee lover, stock market buff, or financial nerd, this book provides good reading material and lessons along the way.

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Mutual Funds vs. Individual Stocks

The vast majority of people should invest in mutual funds. Essentially, a mutual fund is a conglomeration of various stocks, and/or bonds, and cash. It is funded by many investors pooling their money together and rely on the expertise of a professional mutual fund manager who with a team of analysts manage the investments. They determine which stocks will be invested in and when the appropriate time is to buy, sell, or hold a stock.

The mutual fund manager and his or her analysts spend a great deal of time researching various companies and staying up to date on news surrounding them, financial reports, and market trends. These guys are major financial nerds who live and breath numbers.

Another major reason that mutual funds are a good option is the concept of diversification. Most mutual funds will hold at least 30 different stocks all the way up to index funds such as the Vanguard 500 fund which emulates the movement of the 500 companies in the S&P 500. This broad base of stocks spreads risk amongst many different companies so that if an example such as what occurred with Enron, the effect to the fund would be minimal.

When investing in individual stocks, a high degree of risk is present. A company may come out with poor earnings, encounter a major lawsuit, or their industry turns sour, and the stock price plummets. The investor may see any gains made quickly erased. By the same token, positive results may occur for the company and the stock price will sky rocket.

The only reason a person should ever invest in an individual stock is if he or she thinks that he can beat the return on a mutual fund. This implies special knowledge about the company which the rest of the market may not be aware of. It doesn't necessarily refer to insider trading but if he or she knows something about a company, chances are that some of those financial nerds at the mutual fund do too. Remember, those guys do it for a living. They have a vested interest in making good picks.

If a person insists on investing in an individual stock, he or she must be disciplined to spend significant time researching the stock before purchasing as well as while holding the stock. News comes out on a regular basis which can dramatically affect the price of a stock and so it behooves the investor to stay well informed on the health of the company in which their invested.

Mutual funds don't sound especially exciting but over a long term (5-10 years) consistently perform well. Gains of 12% can be expected if looking at a good fund over a long period of time. An investor should research the track record of a fund and select one which lines up with his or her goals (there are many different types of funds such as growth, value, index, aggressive, international, small cap, blue chip, etc.) He or she would likely want to invest money into several types of funds as well which will add further diversification.

Mutual funds provide a solid investment vehicle which offer great returns over a number of years. While great gains can be made with individual stocks, great losses can also be incurred. The risk along with the significant knowledge gap and time the individual has versus professional money managers should give significant pause and nearly always tip the scale in favor of investing in mutual funds.

Real Money: Sane Investing in an Insane World

Real Money: Sane Investing in an Insane World by James Cramer.

Jim Cramer of Mad Money (on MSNBC) fame was once a hedge fund manager trading stocks and made his investors tons of money. He's retired from that business nowadays and goes more the route of advising people through his radio show, TV show, and website. In this book, he describes the ins and outs of investing and trading on the stock market and strategies for playing the cycles of the market.

One of his rules is that if you are going to invest in individual stocks, you need to spend at least an hour per week keeping up to speed on it. He also recommends diversification by having a minimum of 5 stocks in a variety of businesses sectors such technology, health care, oil, grocery/consumer goods, financial companies such as banks, among others.

He makes clear that he does not advise nearly as aggressive a strategy when looking at retirement versus more discretionary income. Mutual funds are definitely the way to go for a vast majority of people who don't have the time or inclination to truly research and investigate the fundamentals and news of a stock. He provides advice on good mutual fund managers if one wants to go more that route.

I enjoyed the stories from his days as a hedge fund manager also told in his book Confessions of a Street Addict. These helped illustrate lots of his points and rules to live by when trading/investing in the stock market.

Overall, he does a good job at helping the reader to understand the nuances of the stock market which can be esoteric to those not in the know or who don't do it professionally.

My personal advice is that unless one believes they can beat the market or the return of a professional mutual fund manager, he/she should stay away from individual stocks. While the reward can be high, the risk is also very high compared to the diversification of an index or mutual fund.