My MOMA Advice

I was tagged by Stealth Wealth to continue Moolanomy’s My One Money Advice (MOMA) Meme. Moolanomy is trying to promote financial responsibility and awareness in our hyper consumption society.

The question: If you can give one advice, tip, or story related to money, what would you share?

My advice is to form habits. It doesn't really matter what they are, but remember there's a difference between forming habits and picking them up (at least in the way I use the words). Forming implies some directed effort, I think, whereas picking up implies that it's all happenstance. Picked up habits are often bad, whereas formed habits are often virtuous. Exercising regularly, for instance, doesn't just happen for many people, it has to be consciously achieved.

Today, a lot of things in the financial realm of our lives can be automated. Many bills can be paid automatically, savings can be deducted from your paycheck, IRA and 401(k) contributions can be made automatically. Those should be taken advantage of whenever possible, but it's interesting that automating your life externally is in a sense a way to avoid forming good habits internally. So even though I make automatic payments when I can, I still have mixed feelings about it because I don't think it provides you with the same benefits.

One of the habits that I'm trying to form right now is checking my mail regularly. Sad huh? In the past I have gone for a month at a time without checking the mail. One time the mailbox was so full that the mailman left me a note saying he couldn't fit any more mail into the box! I think I picked up that habit through classical conditioning -- when I had a lot of credit card debt, going to the mailbox began producing the same sense of dread as opening the mail to find a credit card statement that I felt like I had no hope of paying off.

Oftentimes, a good habit may seem totally unrelated to your finances, but will nonetheless have an impact. For instance, a seemingly non-financial habit I'm trying to form is keeping my apartment clean. This includes taking the trash out regularly, doing the dishes each night, vacuuming, etc. What's that have to do with finances? Well now that it's cleaner, I realize that I used to seek to escape my apartment by going out and doing useless stuff that ended up wasting a lot of money. I would go out to a cafe to have an expensive coffee just to be in a different environment. I went out for dinner a lot because the kitchen was too messy.

Another nice habit is getting up early and having a morning routine. I'm one of those people who, for most of their life, got up at the last minute, threw on some clothes, and always seemed to be a few minutes late. I want to be the kind of person who gets up early, makes a nice breakfast, and has a cup of coffee with the morning paper. Financial benefit: eating breakfast regularly at home will save lots of money compared to stopping at the drive through. Health benefit: well, it's a lot healthier too.

But the main benefit of forming habits isn't the immediate financial payoff. It's that you become a more responsible and balanced person and, I feel, you are more connected to life. In the long run, I think that can have a huge impact on your finances and general well-being.

If anybody wants to suggest some other good non-financial habits that end up having a positive impact, I'd love to hear about them. :)

Bought more AAV

On my lunch break I happened to see that AAV was down about 6%. There isn't any news that suggests a reason for this, but the Yahoo Finance message boards speculate that the sharp drop is due to two factors. First, they speculate that over the past few months, hedge funds have been spending a lot on Canadian energy stocks because of the possibility of quick gains from mergers and acquisitions within the industry due to the depressed share prices. There has been some activity on those fronts, but not as much as was expected. Now that prices have been recovering, they are not as attractive for takeovers, so people are losing faith in buyout rumors. The hedge funds need to sell their shares and take their money elsewhere. Some have suggested that they are facing credit pressures due to their use of margin and leverage. Whatever the reason, there's no doubt that there was a large amount of selling done today.

Anyway, the second factor (according to the boards) in the price drop was that Canada's markets are closed today. This took away a good portion of the support for AAV in terms of buyers. The high selling activity in combination with the low buying activity can only mean one thing -- sharp drops in price.

Who knows how accurate the part about hedge funds is, but on the face of it this looks like another good chance to buy some AAV while it's undervalued. I originally got in even lower than this point, and as it climbed I regretted not buying more shares. Now it seems that I have another chance. To get some fast cash, I sold my entire DUK position. I'm not disenchanted with DUK or anything, but it was either that or GE. I put the proceeds into AAV.

This is one of the two reasons I don't have AAV in my IRA. The first one is that I heard that the foreign taxes on AAV dividends can't be recovered in an IRA (which doesn't bother me right now, but could be important down the road). The second is that it's a pretty volatile stock and that's not the sort of thing you want in a small IRA. My IRA money is fully invested and I can't contribute anything more this year. If a stock drops significantly, I'm stuck just watching it or cutting my losses and selling. As my balance grows over the years (can someone tell me why contribution limits are so annoyingly low, when 401(k)'s and other retirement instruments have much higher limits??? It really stinks for those of us who don't have a retirement plans via their jobs) I will build up enough ballast in the form of bonds and cash that I can invest in riskier stocks. But until then, my IRA will have to be a bit more conservative.

Luckily, I got in just before AAV began a slight recovery. Even if it goes up quickly again, I don't think I'll sell these shares. Instead, I'll take my next few contributions and restore my position in DUK. I'm excited thinking about what my portfolio will look like by Christmas.

By the way, even though it's high summer, with temperatures reaching 100F, Christmas is only about 4.5 months away. Isn't that weird? I need to take a few more trips to the beach this year before the sun is gone. I should also start thinking about budgeting for presents in advance (something I've never, ever successfully done).

Growth estimation formula

I was thinking yesterday of how cool it would be to open an investment account for your kids when they're born and deposit $2000 a year in each one. To figure out how much money they would have after n years on a calculator isn't easy, due to the addition of money each year. In a flash of inspiration, though, I realized that the total growth could be calculated easily if you pad the initial deposit such that the interest earned in the first year equals the amount you would normally deposit. Then at the end, subtract the initial padded amount.

For instance, how much money would your child have at age 20? Well, assuming 10% return, you would need $20k to generate your $2k payment. So we use the simple compound interest formula to get 20000 * 1.1^20 = 134550. Subtract the original 20000 and you're left with 114550. How does this compare to using, say, bankrate.com? They come up with 125052, which is pretty close. How cool of a college graduation present would that be?

Is there a more accurate estimation that's still easy to compute? I play these number fantasy games all the time, so any tips would be appreciated. :)

Dividends

I was surprised to see that Best Buy had given me a little dividend in my IRA and it's already been reinvested in partial shares. Some bloggers post a nice table of historical dividend returns, and it's really cool to see how (pretty much) each time the dividend gets a little bit bigger. So I'm going to start doing that. At least it'll give me something to post about! Hmm, well since most of my investing money is in Scottrade still, which doesn't have free dividend reinvestment, you won't see the same exciting compounding action. But most of the companies I invest in have a history of raising their dividend periodically, so there will be at least some increase. Anyway, without further ado:

AAV

• July 2007 - $36.51

AGG

• July 2007 - $2.10, reinvested into 0.021 shares

BBY

• July 2007 - $2.00, reinvested into 0.046 shares

DUK

• Coming in September...

GE (Scottrade)

• July 2007 - $28.00

GE (TD Ameritrade)

• July 2007 - $5.60, reinvested into 0.139 shares

JNJ

• Coming in September...

Holy cow batman

On a whim I just logged into Google AdSense and saw that I have actually made some money -- 36 cents! I'm not being sarcastic when I say that I never expected to make that much money with this blog.

The reason I put an ad on my blog was that I was intensely curious what sorts of ads would be shown. At first it was stuff like "Hot penny stocks!" and "This stock is poised to EXPLODE!" and I was rather disappointed. But the other day I saw an ad for a report on Warren Buffet's portfolio. Now we're talking.

Rough day in the market

I have to be honest and admit something: I would be perfectly okay with a market crash right about now. Since I only have a small amount of money invested, it wouldn't really have much of an impact on me, but it would be a great chance to get in low with my next few contributions. I would be sad that I can't put more into my IRA, but at least I have some of that in the AGG bond fund (for that very reason).

AAV has been down fairly significantly in the last few weeks and it fell about 5% more just today! That doesn't bother me because I'm still making a good return on it. When I get my next paycheck I'll pick up a few more shares.

I still think that, long term, AAV is a good investment. Canada is obviously going to play a bigger and bigger role in the world supply of oil and natural gas (for America in particular). AAV gets about 1/3 of their production from oil and the rest from natural gas. As it turns out, natural gas plays an important role in the extraction process of oil from Canada's oil sands, so it seems pretty safe to assume that demand for natural gas in Canada itself is going to go up dramatically in the next decade. Unless they decide to build some nuclear reactors to provide heat for the extraction process... but doesn't it take like 20 years to build a new plant anyway?

Well, I don't think the market is about to crash. Hopefully I'm not jinxing it!

Evaluating stocks to buy

In the past few months I've been making two kinds of purchases: very long-term, and mid-term. As such, I've got two ways to evaluate which stocks to buy.


Very long-term

For very long-term buys, like the kind that I honestly don't plan on selling for 40 years or more (if ever), the first thing to decide is what industry to invest in. This depends mostly on what I think is going to happen in the world over the next 20 years or so. Here are a few of my speculations (some of which are pretty obvious):

• BRIC (Brazil, Russia, India, China) is going to grow. A lot. And a lot of it is going to be growth in infrastructure, simply because they are relatively undeveloped.


• The dollar is going to start recovering.


• Chinese stocks are going to fall significantly sometime in the next few years, at which point they will make great investments.

Those are the three I feel pretty sure about. The first one has made me interested in infrastructure companies like GE and ABB. Before I graduated, I had an internship at ABB and was struck by an anecdote told by the vice president of R&D during a meeting. He said they weren't doing too well in India because their equipment was too expensive and complicated. The Chinese, on the other hand, absolutely loved how complex it was and bought it like crazy. I can totally picture that.

Anyway, the second point makes me kind of sad. I want to invest in overseas companies (like ABB) but if the dollar begins recovering, that will eat into my returns. So I want to focus mostly on American companies that do no more than half of their business overseas.

The third point has an obvious strategy -- wait until Chinese stocks fall (if they ever do) and then buy the nice ones.

Aside from those strategies, I currently am a big subscriber to the dividend growth theory: Companies that have a history of paying dividends and consistently increasing those dividends make great long term investments. This is a pretty well-researched area and I feel pretty confident in it. One source of ideas for such companies is Standard & Poor's "Dividend Aristocrat" list. Or you can just think of big companies that have been around for 100+ years and you'll pretty much be right on track.

Only when I've narrowed down my list to a few companies (that match the criteria above) do I start looking at the financial details. The first thing to look at, of course, is the stock chart. You can get a quick overview of how the market has "liked" the company over the past 5 to 10 years. Sudden drops or spikes always require investigation, but the best thing (to me) is a relatively flat graph. To me, a successful company whose stock price isn't going up is like a spring gathering potential energy. Eventually, it will make up those flat years with strong growth years.

The metric associated with this, of course, is the P/E ratio. If earnings have been growing and the price has stayed flat, the P/E ratio will decrease. Companies with P/E ratios below that of their peers, and below their own historical P/E ratio average, are definitely something to look into.

While normally I agree that timing the market is very difficult, I think this strategy is pretty realistic. Since there are so many good companies to invest in, the chances of a few of them being in one of these lull states is fairly good. I think of it as an opportunity to time-travel back a few years and invest. If a company is trading in the same range it was 5 years ago, investing today is equivalent to investing back then.

This option is primarily for new investors, like me, because half the risk of market timing is selling too early. In other words, if you start thinking "Oh GE isn't going to move for the next 5 years, I better sell" then you have a good chance of missing out. Only a new investor can look at the chart and say "Heh I'm glad my money hasn't been sitting idle for 5 years." But since investors typically add new money into their positions periodically, you can still look out for the same things. It's just not as comprehensive since this plan doesn't speak to your existing investments.


Mid-term

The other evaluation method is for mid-term investments. These, to me, are investments that you want to hold for an unknown amount of time, but typically less than a year. I see them more as price goal investments. The main source of these ideas comes from reading about sudden drops in stock prices. Earnings misses, natural disasters, war, anything can cause them. Your job is to do some research and guess at how much of the price drop is legitimate versus investor overreaction. I feel like most sudden drops in otherwise good companies are overreactions and the price will recover in the short term.

For instance, look at Duke Energy. They seem to have been affected by two things in the past few months. First, the recent interest rate hikes, which (I've read) send utility stocks down because of competition with their dividends. Apparently a lot of people invest in utilities for the dividend with the bonus of slow growth, which will probably out-perform bonds. When interest rates go up, people ditch the utilities and go to bonds. Sounds crazy to me but I believe it.

Second, Duke Energy wants to build new plants. Nuclear plants. Investors seem rather terrified of this idea -- whenever news comes out of some environmental group trying to stop them, the stock price goes up a bit. When more news comes out that they were unsuccessful, I think it's fair to say the price plummets a bit. Even Duke Energy's requests for rate hikes don't allay investors fears. I guess it's somewhat sensible for short-term thinkers, given that interest rates may be going up and Duke Energy is going to acquire lots of debt in the next 10 years... but still. Utilities have to expand eventually or what good are they?

I see both of those things as overreactions. I think that when all is said and done, new plants (not just nuclear but natural gas and coal) will give Duke Energy more customers, more revenue, and more profit. Then their price will go up. It's currently hovering around $18, down from $21 earlier in the year. The price drop has pushed up their dividend yield to almost 5%, and I suspect the price will recover as they A) keep raising their dividend and B) get some sweet incentives from the government. Anyway, that's what I hope will happen. :)