Getting Rich Quick (is not necessarily good)

Today’s culture glorifies getting rich as quickly as possible.

This is why many people try to take shortcuts and fall for rich-quick scams. Despite the Nigerian type of scams being around since the 18th century (this is where the sender asks you to help them get a very large sum of money out of the country), people still fall for them.

The media also highlight young entrepreneurs who hit it big with the latest startup. It’s easy to see people like Facebook founder Mark Zuckerberg, who became a billionaire at 23, and feel as though we are behind the power curve.

So how long should it take?

According to Tom Corley, author of Rich Habits: The Daily Success Habits of Wealthy Individuals, it took a minimum of 32 years for the average rich person to become rich.

It took the vast majority almost four decades, with 52 percent taking 38 years and 21 percent taking 42 years to become rich.

In fact, only 4 percent became wealthy in less than 27 years!

Becoming wealthy didn’t happen overnight; it required years of discipline, hard work and patience.

Corley states, “The path to riches is a long, lonely one, paved with many potholes and numerous dead ends. Those few who do make it are seasoned veterans in the world of entrepreneurs, deserving of their own, well-deserved catchphrase.”

Many are looking to hit a home run or grand slam to wealth.

While it definitely is more exciting and tends to make front page news, almost all will end up striking out.  Getting rich quickly is a rare phenomenon, and many who do end up worse off than before.

Just look at some lottery winners and professional athletes, who end up bankrupt only a few years after either winning or retiring from their sport.

To use my baseball analogy, being consistent with singles, walks, bunts and maybe the occasional double is far more effective over time in winning the game. You don’t want to count on that grand slam to achieve your goals.

-- David Chang, MidWeek, March 18, 2015

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According to the U.S. Census Bureau, the median net worth for households under the age of 35 is $6,682. This makes sense, since many in this age group have student loans and are just getting started with their careers. The 70th percentile of those under 35 (meaning their net worth is greater than 70 percent of households their age) is $33,477.

Here is information for the other age brackets. Visit artofthinkingsmart.com/networth for more detailed information!

Age: 35-44
• Median: $35,000
• 70th percentile: $128,430
Age: 45-54
• Median: $84,542
• 70th percentile: $228,708
Age: 55-64
• Median: $144,200
• 70th percentile: $333,750
Age: 65 and up
• Median: $171,135
• 70th percentile: $334,870

The difference between the median and those in the 70th percentile is anywhere from two to four times the median amount. I didn’t include the 90th percentile, but if I did, the difference would be significantly greater.

Why the large disparity? Is it education, inheritance or just plain luck?

There are many theories, but recent research shows that people near the top have different personality traits than people near the bottom. It isn’t just about the ability to save or make more money. Studies show that our psychological makeup and character traits are the reasons for our wealth (or lack thereof), not the result of our wealth.

Here are four common traits those in the higher net worth group have among their peers.

1) Keep track of their finances diligently. This is an obvious one, of course, but more than 60 percent of Americans don’t keep track of their money! Without knowing how much is coming in and out, it is difficult to know how much to save. Also, by not paying attention to where your money goes, it is easy to let your emotions govern your spending habits. Splurging and trying to keep up with the Joneses is one of the reasons why only 18 percent are confident about retirement. Many don’t like to budget, since it can seem tedious. But the goal isn’t necessarily to track every penny, but to make sure you spend less than you make, and then invest the difference.

2) Have a long-term view. One of the top regrets retirees have is not saving enough. You don’t need a significant amount of money to invest, you just need to be consistent and use the magic of compound interest. Time is the most important factor! Sacrificing a little now can reap significant benefits in the future.

3) Are not afraid to take risks. You don’t want to take any risk, but you want to take smart risks. We all have some form of fear when it comes to money, but the key is how you deal with that fear. Some experience “paralysis by analysis” and never take any steps forward. Taking smart risks means to ask for that raise, start a business, change jobs or invest your long-term money in stocks. It is about pushing yourself out of your comfort zone.

4) Have a healthy amount of self-esteem. This isn’t about being arrogant but about believing in themselves. They are confident and not afraid to take that smart risk to make and accumulate more money. They are more optimistic in the decisions they make and despite failures, are able to bounce back even stronger.

david@artofthinkingsmart.com 

Warren Buffett believes in bad food

Warren Buffett knows you are weak. Even if you hit the gym regularly and demonstrate Buffett- esque discipline with your investments, sooner or later you’re going gulp down a sugary soda and put your money into mac-and- cheese with a bright orange hue.

Buffett believes in bad food, both as a consumer and an investor. While there might be no long-term reward in risky eating, there's relatively little risk in buying best-of-breed junk food holdings—at least if Berkshire Hathaway returns are any measure. Omaha has made a mint on artery-based arbitrage.

Let’s take a stroll down Buffett’s bad-for-you buffet:

* 1940: Buffett has been a Coca-Cola investor since he sold the stuff door-to-door in his childhood. At the end of 2014, Berkshire owned 9.2 percent of Coke shares

* 1972: Berkshire Hathaway buys See’s Candies for $25 million

* 1998: Dairy Queen, which had 5,790 outlets at the time, becomes a Berkshire Hathaway holding for $585 million

* 2008: Berkshire Hathaway put up $6.5 billion to help Mars purchase of chewing-gum maker Wm. Wrigley Jr.

* 2013: Buffett pours $12.25 billion into a deal to take ketchup- and-packaged-food giant HJ Heinz private under 3G Capital, a Brazil-based private-equity firm.

* 2014: Berkshire Hathaway provides $3 billion financing for Burger King’s purchase of the Tim Hortons donut empire. It is getting a 9 percent annual return.

Today, of course, Buffett is back at it again, working with 3G to bring together Kraft Foods Group and Heinz. The deal creates the third-largest food and beverage company in North America—a veritable mountain of ketchup, cold cuts, Kool-Aid, and lots and lots of cheese.

While cutting these deals, Buffet was putting his mouth where his money was. His diet consists of Cheetos, licorice and—most often—Utz potato chips as an important source of vegetables. The even investor is known to drink Coke at breakfast, a meal for which the main even is occasionally ice cream.

When asked about his diet, Buffett has said he aims to eat like a 6-year-old because that’s the age at which mortality is least likely. In terms of investing, his junk-food strategy is even more straightforward: People like to indulge. “No business has ever failed with happy customers,” Buffett said at Coke’s annual meeting in 2013.

profiting from rising rates

Following another strong jobs report, the Federal Reserve is widely expected to drop the word "patient" from its monetary policy statement next Wednesday, signaling that a rate hike is likely coming soon. Whether it happens in June or September, higher interest rates appear to be finally coming.

Be prepared before that happens. Because by the time our central bank officially announces it is raising rates, many stocks will already have the move priced in.

There will be clear winners and losers during a rising interest rate environment. Investors looking to profit from a rate hike, or simply avoid significant underperformance, should consider shifting their portfolio now.

Rate Hike Losers
The Fed has stated if the economy continues to improve, rates will rise. After a stellar February jobs report blew away expectations, it's looking very likely that rates could rise sooner rather than later.

It's well known that a rising interest rate environment is bad for bonds overall, as their prices move opposite of rates. This is especially true for long duration, low coupon bonds. However, the impact on stocks will be much more mixed.

Some areas of the market are likely to suffer. Here are the areas I would avoid:

• High Yielders: As interest rates march higher, dividend yields will look comparatively less attractive to income investors than the yields on fixed income and money market accounts. Areas like real estate investment trusts (REITs) and utilities meet these criteria, as do Master Limited Partnerships (MLPs) and some stodgy consumers staples. The "reach for yield" trade that drove the valuations of many of these high yielders to record levels is likely coming to an end soon.

• Highly Leveraged Firms: Companies with highly leveraged balance sheets that rely heavily on debt financing are likely to underperform too. That's especially true for firms who are constantly issuing short-term debt to meet their obligations. Higher interest rates means higher interest expenses for these firms, and less profits. Once again, both real estate investment trusts (REITs) and utilities generally fit this description. It should come as no surprise that both areas significantly underperformed the S&P 500 during the second half of 2013 as long-term rates rose amid taper talks.

• Exporters: While our central bank is looking to raise interest rates, much of the rest of the world is trying to lower theirs. This could very likely lead to continued strength in the U.S. dollar, which would make our goods comparatively more expensive overseas. That would create a headwind for large multinational firms that derive a majority of their revenue from outside of the United States.

Rate Hike Winners
However, there are some industries that are clamoring for higher interest rates:

• Insurers: One particular beneficiary of higher rates is the insurance industry. Insurance companies take in premiums from customers, invest them - usually in fixed income securities like bonds - and then pay out claims in the future. Much of their profits are made on the interest income from their investments. When rates rise, they will be able to earn more interest from their investments. While it's true the value of their existing bond holdings would decline when rates rise, insurers with a relatively short duration on their investment portfolios should be relatively immune.

• Brokers: Other companies anxiously waiting for rates to rise are brokerage firms. Brokerages earn interest income on un-invested cash in customer accounts. So when rates rise, they can invest this cash at higher rates. While they will have to pay more interest on those cash balances, the spread between what they earn and what they pay out should widen from where it is today.

• Banks: Banks could also benefit from rising interest rates, as long as long-term rates move up more than short-term rates. Think about a bank's business model: they pay interest on deposits and loan that money out at higher rates. The interest rates on deposits are typically tied to short-term rates while loans are often tied to long-term rates. In other words, banks benefit from a steep yield curve, meaning when the spread between long-term and short-term rates is wide. So if the Fed hikes short-term rates, but long-term rates like the 10-year stay put, this will actually hurt net interest margins.

However, keep in mind that if the Fed raises rates, it will be because the economy is improving and inflation expectations are rising. Both of these conditions typically drive up long-term interest rates too, likely by more than the Fed raises short-term rates (usually in 25 basis point increments). Also, an improving economy means that credit quality is likely improving, which is great for banks' bottom lines as well.

Small cap banks should benefit the most from a steeper yield curve since a larger chunk of their profits come from interest income than large cap banks, which usually have more diversified revenue streams and are less susceptible to the yield curve.

The Bottom Line
If the U.S. economy continues to improve, then expect the Federal Reserve to finally increase interest rates from their rock-bottom levels relatively soon. Be prepared for the rate hike by shifting your portfolio now before it gets fully priced in. While some areas of the stock market are likely to underperform, others are well-positioned to profit. You should be too.

-- Todd Bunton, Weekend Wisdom

rich habits

According to a recent study by Tom Corley, author of Rich Habits: The Daily Success Habits Of Wealthy Individuals, there are few key habits that separate the rich from the poor.

What was one of the “rich” habits? Reading. While both groups read roughly the same amount, the key difference was what they read. The financially successful people read for self-improvement, while the less-successful primarily read for entertainment.

The study found that 85 percent of rich people read two or more books on education, self-improvement or career advancing a month, compared to only 15 percent for the poor; 94 percent of the rich read news-related publications, compared to 11 percent of the poor; and 11 percent of the rich read for entertainment, compared to 79 percent of the poor.

Becoming rich doesn’t happen overnight. But by constantly improving upon your knowledge, experience and skill set, you acquire the expertise needed to become wealthy and, more importantly, stay that way. This is why many athletes, lottery winners and movie stars declare bankruptcy after initially achieving their riches.

Another key habit is having a mentor — 93 percent of the rich who had mentors stated that their mentors were responsible for their wealth. Their mentor’s hindsight became their foresight, avoiding unnecessary mistakes, opening up doors of opportunity and providing the support needed. For those who didn’t have a mentor, Corley writes that they mentored themselves through books, experience and the school of hard knocks.

With the Internet, technology and many professional organizations out there, anyone can have easy access to the books and mentors people should have and need!

-- David Chang, Midweek, March 11, 2015

gold stocks

Since gold peaked around $1900 per ounce in 2011, gold stocks have endured a challenging three years. In 2014, things started promisingly enough as gold stocks began to stage a recovery in the first half of the year. This was before weakness in global currencies, versus the U.S. dollar, and expectations of a Fed rate hike combined to reverse the momentum. And then, towards the end of last year, sentiment tumbled to all-time lows creating a unique opportunity for contrarian investors.

However, while gold declined slightly in USD terms during 2014, it actually posted respectable gains in most foreign currencies.

Gold has historically had an inverse relationship with the US dollar. Because gold is priced in USD, as the greenback strengthens the gold price typically weakens. However, in the first two months of 2015 this hasn’t been the case. Why? Well, a number of factors have driven renewed investor interest in both gold and gold equities. This includes stubbornly low inflation, fears of outright deflation in Europe and Japan, the ongoing conflict in the Ukraine and continued uncertainty surrounding Greece’s future as an EU member nation.

In a bid to stimulate growth, several central banks have enacted negative interest rate policies leading to approximately $2 trillion of government debt globally that has a negative yield. This diminishes the opportunity cost of holding gold at a zero yield.

Increasingly, investors are also growing concerned about the unforeseen consequences of central bank policies. Most recently, the markets were rattled when the Swiss Central Bank abandoned its commitment to peg its currency to the Euro. As a result, investors have begun to return to the sector. For the first time in several years, inflows to gold ETFs have turned positive and gold equities have been strong performers year-to-date.

So, why should investors consider gold stocks? The primary reason is portfolio diversification. Historically, the correlation between gold stocks and traditional stocks is very low. With the S&P 500 and Dow Jones indexes at all-time highs, it could be a good time to consider an asset class that typically does well during stock market corrections.

-- Mitch Zacks, Market Insights, Zacks Investment Management

the Dow of Apple

(Reuters) - Apple Inc (AAPL.O), the largest U.S. company by market value, will join the storied Dow Jones industrial average .DJI, replacing AT&T Inc (T.N), in a change that reflects the dominant position of iPhone maker in the U.S. economy and society.

The decision to nudge aside AT&T, which has been part of the Dow for the better part of a century, is a recognition of the way in which communications and technology have evolved over the last several decades.

The action, by S&P Dow Jones Indices, had been widely expected since Apple split its shares seven-for-one in June 2014.

The Dow industrials is the oldest U.S. stock average, first been published in 1896. Its compact size - just 30 names - and its mission to reflect the U.S. economy mean it has a familiarity for retail investors that other indexes that cover a greater portion of the market's value do not.

Even though professional managers generally benchmark against the S&P 500, additions and removals from the Dow are still seen as a big event. It was last altered in September 2013 when Goldman Sachs Group Inc (GS.N), Visa Inc (V.N) and Nike Inc (NKE.N) were added.

AT&T was added in 1916, the year after the first-ever transcontinental telephone call. It was removed in 2004. After SBC Communications renamed itself AT&T following a 2005 merger, it was reinstated.

"It was a new way of life: telephones, back then 100 years ago, these talking machines," said Howard Silverblatt, chief index analyst at S&P Dow Jones Indices.

In a twist of fate, Apple owes some of its success to its partnership with AT&T over the iPhone, the device that propelled Apple's dominance. The iPhone first hit the market in 2007 with AT&T as its exclusive carrier, a deal that continued for more than three years.

Kevin Landis, chief investment officer of Firsthand Capital Management, a Silicon Valley-based technology-investing specialist with $300 million in assets under management, said he hopes that this is not a sign that Apple is past its prime.

“The Dow Jones is such a backwards-looking list, I cringed when Intel (INTC.O) and Microsoft (MSFT.O) were added," Landis said. "I'm cringing today. Let's hope Apple can defy the forces of history."

Intel and Microsoft joined the average in November 1999, and their performance was weak for years following.

*** [3/11/15]

Another stat/factoid being tossed about for your consideration: Companies added to the Dow outperform the S&P 500 by 3% in the 30 days after the announcement, according to Bernstein Research.

But that outperformance tends to be short-lived. There is a “clear pattern” of good performance leading up to the addition then “bad performance following,” Jason Goepfert, president of Sundial Capital Research, tells Marketwatch.

Goepfert examined the 20 days before and after an addition but recent history suggests the index tends to add stocks when they're peaking, and occasionally before big falls. Notable examples include Intel and Microsoft, added to the Dow in November 1999, and Bank of America, which was added in February 2008. On the flip side, stocks often perform well after being booted from the index, with Hewlett-Packard being the most obvious recent example. (The stock is up about 55% since being dropped from the Dow in September 2013.)

This is by no means a recommendation or a forecast but I can assure you some professional investors are right now looking into a paired trade: Short Apple-Long AT&T. (Update: In 32 of 50 Dow changes from 1928 to 2005, the deleted Dow stock outperformed the added name, and the portfolio of stocks removed gained 19% over next 250 trading days vs. a 3% gain for stocks added, according to this 2005 academic study by economists at Pomona College.)

this fund buys & holds

(Reuters) - Equity investors pursuing a buy-and-hold strategy might want to check out a fund that hasn't made an original stock market bet in 80 years.

The Voya Corporate Leaders Trust Fund, now run by a unit of Voya Financial Inc bought equal amounts of stock in 30 major U.S. corporations in 1935 and hasn't picked a new stock since.

Some of its holdings are unchanged, including DuPont, General Electric, Procter & Gamble and Union Pacific. Others were spun off from or acquired from original components, including Berkshire Hathaway (successor to the Atchison Topeka and Santa Fe Railway); CBS (acquired by Westinghouse Electric and renamed); and Honeywell (which bought Allied Chemical and Dye). Some are just gone, including the Pennsylvania Railroad Co. and American Can. Twenty-one stocks remain in the fund.

The plan is simple, and the results have been good. Light on banks and heavy on industrials and energy, the fund has beaten 98 percent of its peers, known as large value funds, over both the past five and ten years, according to Morningstar.

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Assuming I have the symbol right, the fund has 21 stock holdings with turnover of 0%.

Nasdaq 5000

Finally! The Nasdaq topped the 5,000 level Monday for the first time since March 2000.

The Nasdaq closed at 5,008. It is only the third time it has ever finished above 5,000. Believe it or not, the Nasdaq is now just 2.4% from the all-time peak of 5,132.52 it notched during the Dot-com bubble. 

A lot of people have concerns that this might be a warning sign that stocks are back at lofty levels again, but much is different now versus the Dot-com era. Many of the companies leading the charge this time are well established and have a lot of cash on hand.

Apple has more than $175 billion in cash, for example. And the stock is only trading at about 15 times earnings estimates for this fiscal year. In 2000, some leading tech companies were valued at more than 100 times profit forecasts.

History lesson: Tech stocks plummeted in 2000 as prices for technology companies, particularly relatively new Internet firms, got way too high in a relatively quick fashion. It was a classic bubble.

Several Internet stocks went out of business because they spent too much and did not have solid business plans. Who could forget the likes of Pets.com and its sock puppet in a Super Bowl ad?

The plunge was breathtaking. By October 2002, the Nasdaq had fallen to around 1,108 -- nearly 80% below its all-time high.

 But tech stocks have come roaring back since the broader market bottomed nearly six years ago during the Great Recession.

The mobile and social media revolutions have helped lead the way as Apple, Google and Facebook (FB, Tech30) have all emerged as some of the leading tech companies in the world.

Deja vu all over again? Still, there are some eerie comparisons to15 years ago. Apple is now worth more than $750 billion and some experts are predicting that the company will one day top the $1 trillion market value level.

Back in 2000, many were saying the same thing about Cisco Systems (CSCO, Tech30). That didn't happen. Cisco is no slouch. It's even in the Dow. But its stock has not gotten back to 2000 levels. Its market value is $150 billion.

 Even though a lot of the leading publicly traded tech companies are trading at reasonable valuations, the same can't be said for all firms.

Twitter (TWTR, Tech30) and Netflix (NFLX, Tech30) trade for more than 125 times earnings estimates for 2015. Electric car maker Tesla (TSLA) is valued at about 200 times this year's profit forecasts.

lending money

Many of us may have been in a situation where a family member or friend has asked to borrow money. In 2011, 7 percent of homebuyers borrowed from a relative or friend to help purchase a house, and 14 percent of business owners also borrowed from family and friends to help cover costs. Lending money can help someone in need and create goodwill. But lending money also can be cause for harm in a relationship or lifestyle.

Here are some tips on how to lend money and still keep the relationship on track:

1) Don’t lend money you can’t afford. If you are struggling with your finances, lending money to another person struggling with finances will not only hurt the relationship if it is not paid back but also will set you back financially, resulting in a double whammy. Make sure you prioritize your personal finances so the money will not adversely affect your living situation.

2) Consider it a gift. If you can afford to lend it, it is safe to assume that the money will not be paid back. If the person borrowing doesn’t pay it back, you will not be disappointed and it will not affect the relationship. If you are willing to take the risk, the gift can be seen as a nice gesture to help someone in need. Relationships are more important than money, so if you do end up getting paid back, it will be a nice surprise.

4) Know when to say no. Consider why the person needs the money. If you feel the person is borrowing to fund their lifestyle as opposed to paying for emergencies, you are only supporting their habits. Saying no may force them to re-evaluate their own financial situation. In the long run you will be helping them out.

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and more

[4/14/15] The first rule of loaning money to friends.