How I Got Out of Debt: My Personal Success Story

When you’re in debt or unable to make regular payments on your bills, it feels like you’re carrying a redwood tree on your shoulders. You write checks with your fingers crossed behind your back for good luck, and with each swipe of the credit card you hold your breath hoping not to see that dreaded embarrassment: “declined.”

I used to be that young woman, unable to handle the responsibility that comes with having a credit card; it was a time when I felt as if my expenses, and my inability to have more coming in than going out, would swallow me whole.

While it seems like a common story for people of any age, being in debt has a stigma: it’s not something we talk about. In fact, according to the results of a recent survey from LinkedIn and Citi, which examined professional women’s biggest financial and career concerns, talking about money is such a personal subject matter that 75% of women surveyed aren’t comfortable talking about money through social media—and 36% of Generation Y women polled don’t think that it’s polite to talk about money anywhere.

That’s no way to get out of debt.

I want to be part of the 25% that will talk about it, so I’ll start with my story.

These days, a bit older and wiser (and debt-free), I definitely breathe more easily. I’m more aware than ever of how little it takes to get there in the first place.

My Descent into Debt…

I moved to Washington, DC for college in 2001, and my mother handed me $300 to get me through the first two weeks. My parents would provide an allowance every two weeks, and I was expected to eventually get a job. Within the first week I had blown most of the money on drinks (thanks to a fake ID), shopping trips, eating out, and a tattoo. Oh, yes. I got a tattoo. After discussions on how I spend my money and that a tattoo is not a necessity (who was rebelling? Yes, THIS GIRL) my mother handed me a credit card. “For emergencies only, Heather Lynn.” I was an irresponsible 17-year-old with a penchant for shoe shopping. What could go wrong?

A lot went wrong. It was easy to spend the money in my checking account on the boring necessities, and later make a quick swipe with my credit card for a cute top. Having a credit card allowed me to be irresponsible while feigning responsibility. By the end of college I’d racked up about $2,500 in credit card debt spread over three cards. What forced me to pay it off was when I moved to upstate New York and wondered how I’d ever be able to buy my own home. It was then that I realized I would own nothing in the future if I didn’t pay off what I faced in my present.

…And How I Got Out of It
1. Step-by-step: Slowly and painfully, month by month, I took a steady approach. I looked at which card had the highest interest rate, and I made it a goal to pay that one off first, so for payment to that card, I paid the minimum plus $50.

When you are making $35,000 a year, it feels like you’re perpetually sinking, but after four years of focused discipline, I was free of credit card debt. The thing about being saddled with debt is that you always feel like you’re hunched over, hiding from the world. On the outside, I might have seemed like I had it together, but on the inside I felt like a fraud who didn’t have a handle on her own expenses. To be released from that self-inflicted burden was like coming up for air.

Read More citibank.com

What To Do When Good Stocks Aren’t Cheap

You have to look for a margin of safety in every stock you buy. If you can’t find a margin of safety – you have to hold cash. 

Two people who read my articles sent me these emails:

Hi Geoff,

My question is what strategy should an investor adopt when the market is rising (generally good stocks are not available at reasonable prices in such circumstances)? Should an investor just wait on the sidelines when the market continues to rise?

And the second email:

In general, how do you approach the macro investor problem: When markets are down, value investors pile in, but when markets are up, what should value investors do? Underperform?

That’s what I’m doing now. I have 75% of my portfolio in cash. And I am underperforming. I am up 5% in 2012. The S&P 500 is up 11%. It is no fun making 5% a year. And it is no fun being beat by the S&P 500. 

But when you keep 75% of your assets in cash – you know that has to happen. I would love to be 100% invested. I would always love to be 100% invested. But when I can’t find stocks I like with a margin of safety – I stay in cash. 

It’s odd for me to have 75% in cash. I can’t think of any time in recent years where I kept more than 50% of my portfolio in cash for more than a month or so. It just never happens. But it’s happening now. It’s been happening for most of 2012.

Why?

We all have rules. We all have habits. We all have ways we like to invest. Most investors diversify more than I do. I have low standards when it comes to diversification. I have high standards when it comes to stock selection.

Like I said in a recent article – my required rate of return is 10%. If I don’t think I can make 10% a year in a stock – I don’t buy that stock. 

So I have a rate of return hurdle. I also have a value hurdle. I need to know the stock I am buying is – conservatively calculated – worth more than what I am paying. I need clear and convincing evidence of that. 

I also have a safety hurdle. We’ll call it a comfort hurdle. I need to be comfortable with the industry, the organization, the management, the balance sheet, etc. There needs to be a low risk of catastrophic loss.

I don’t like looking at stocks where I think there is a real chance of losing 50% of my investment. 

I don’t own banks. Over the last few years – there were many cheap banks. There still are some. Many of them have a real risk of catastrophic loss. You could lose 50% of your money if the world goes against you.

That is not true in Kimberly Clark (KMB). That is not true in Waste Management (WM). That is not true in Carnival (CCL). Or in Omnicom (OMC).

Those are companies in industries with solid demand. They are businesses with solid competitive positions. If you know they are cheap – and you know they can make you 10% a year – those are stocks you can feel safe buying. 

So when I say I’m not finding stocks to buy – I am saying I’m not finding stocks that check all 3 boxes at once. They need to be worth more than they are trading for. They need to be safe. And they need to offer a return of 10% a year.

There are some stocks I know are safe. A good example is Copart (CPRT). That is a safe stock. Demand for the service is stable. It will be around as long as car insurance. Copart’s competitive position is solid. I like the management. The balance sheet – which is chock full of land – is fine. It’s clearly a safe stock.

But is it cheap? Copart trades at 21 times earnings. It trades at over 4 times sales. And the price to book is so high it has no meaning. 

So I like Copart. I follow Copart. But I don’t own Copart. It only checks one of the boxes I need checked. It is a good, safe business. But it isn’t cheap. And it doesn’t promise 10% annual returns. So I can’t buy the stock.

Then there are stocks that are cheap. No one doubts they are cheap. But are they safe? Are they the kind of business I feel comfortable owning?

Think about Bank of America (BAC). Or Hewlett-Packard (HPQ). Or even Microsoft (MSFT). 

Whether you can buy these stocks depends on where you draw your circle of competence. HP is definitely outside my circle. There is not even a kernel of understanding in that business for me to latch onto. I don’t know their products. I don’t know their customers. I don’t see how they differ from others.

And I’m writing this on an HP desktop. But I only own that desktop because another – non-HP computer – broke. They could ship an HP that day. So I bought an HP. I don’t like or dislike the desktop. And I wouldn’t buy another HP. 

A lot of companies – mostly big companies – fall into the HP category for me. They are big. They compete with other big companies. And I’m not sure I understand what they do. Why they make the products they do. Why they provide the services they do. And why any customer would stick with them.

These stocks may make good bets. It might be a great idea to buy Hewlett-Packard LEAPs. I don’t know. It isn’t the kind of stock I am looking for. Because I’m looking for a business I understand. Where I understand the company’s behavior. And I understand their customer’s behavior. That – more than anything – is what gives me comfort. 

So no HP for me. No matter how cheap it is. What about Bank of America? Warren Buffett has a preferred investment in Bank of America. He obviously thought the common stock was cheap. He got 10-year options as part of the deal. 

I’m a Bank of America customer. And I have no doubt that – in five years – they will have more of my dollars at their bank than they do now. That’s a good sign. 

There are very few businesses that can count on getting more of my business in the next five years. I’m sure Amazon (AMZN) will make more money off me in 2017 than they do now. I’m sureSouthwest (LUV) will make more money off me. And I’m sure Bank of America will too. That’s about it.

These businesses all have some things in common. They scale well. They have big competitors. And parts of the experience they offer are unpleasant. 

Amazon benefits from how little I liked shopping at Wal-Mart (WMT). It was never a fun place. Some people like being in actual stores. I’m not one of them. So Amazon doesn’t need to match stores on price to keep my business. I’m always willing to pay up a little for the convenience of online shopping, home delivery, etc. 

Southwest is a more direct winner. They offer more frequent flights on the routes I want. They have good prices. And I like the actual experience a bit more. Again, very big, unimpressive competition is part of why I can be sure I’ll fly Southwest even more in the future. The alternative is worse.

So why am I sure I’ll bank more with Bank of America? It’s a sticky business. It’s a big hassle to move. They own a broker – Merrill Lynch. Online banking is important to me. Their brokerage and online services can match anyone’s. And I don’t like going in a branch. So superior customer service by a local competitor won’t get my deposit.

Warren Buffett on Hedge Fund Managers and Going Long Versus Short

Berkshire Hathaway's Warren Buffett recently was interviewed by Andrew Ross Sorkin for Dealbook and he made some interesting comments about hedge funds, respected investors, and short selling that we wanted to flag:

Buffett on Hedge Fund Managers: "They're not as good as the old ones generally.  The field has gotten swamped, so there's so much money playing and people have been able to raise money by just saying 'hedge fund.  That was not the case earlier on; you really had to have some performance for some time before people would put money with you.  It's a marketing thing."

Julian Robertson echoed this sentiment when he also recently commented that hedge funds aren't doing as well as they used to because the competition is more hedge funds.    

Buffett mentioned a few hedge fund managers who were successful like Julian Robertson (Tiger Management), and he mentioned that he liked Seth Klarman (Baupost Group).  As we highlighted today, Klarman was named one of the 'next Warren Buffetts' way back in 1989 by Fortune. 

On Short Selling: "Charlie and I have both talked about it. We probably had a hundred ideas of things that would be good short sales.  Probably 95 percent of them at least turned out to be, and I don't think we would have made a dime out of it if we had been engaged in the activity.  It's too difficult."

On Going Long: "The whole thing about 'longs' is, if you know you're right, you can just keep buying, and the lower it goes, the better you like it, and you can't do that with shorts." 

On Running 'Too Much' Money: "... money starts getting self-defeating at a point, too."

From marketfolly.com

8 Buffett Secrets for Investing in Banks

Berkshire Hathaway's (NYSE: BRK-A ) (NYSE: BRK-B ) Warren Buffett is seen by many as one of the best investors of our time. But he's also often seen as particularly insightful when it comes to investing in banks.

Certainly Berkshire shareholders should hope that the latter is the case as the company owns 8% of banking giant Wells Fargo (NYSE: WFC ) along with $5 billion in Goldman Sachs (NYSE: GS ) , nearly $2 billion of US Bancorp (NYSE: USB ) stock, and roughly another $1 billion between M&T Bank (NYSE: MTB ) and Bank of New York Mellon (NYSE: BK ) . Not to mention $5 billion in preferred shares of Bank of America (NYSE: BAC ) .

So what does Warren know that makes him so prescient when it comes to banks?

1. Owning a bank can be a long-term endeavor.

The banking business is a cyclical one, but bank ownership for Buffett typically isn't. In 1969, Berkshire acquired Illinois National Bank and Trust Company and held onto it until it was forced by regulators to sell the bank in 1980. The company's ownership position in Wells Fargo goes back to 1989, while the stake in M&T Bank dates back to at least 1999.

2. Management matters.

We've seen from the financial crisis how reckless management can lead to outright disaster. When Buffett talks about the banks he's owned, he's generally taking time to praise management. Here's what he had to say in Berkshire's 1990 shareholder letter when praising Wells Fargo's management:

[The team at Wells Fargo pays] able people well, but abhor having a bigger head count than is needed... attack costs as vigorously when profits are at record levels as when they are under pressure. Finally, [they] stick with what they understand and let their abilities, not their egos, determine what they attempt.

3. Leverage kills.

Again from the 1990 shareholder letter:

When assets are twenty times equity-a common ratio in this industry-mistakes that involve only a small portion of assets can destroy a major portion of equity. ... Because leverage of 20:1 magnifies the effects of managerial strengths and weaknesses, we have no interest in purchasing shares of a poorly managed bank at a "cheap" price. Instead, our only interest is in buying into well-managed banks at fair prices.

4. Panic? Not a chance.

Rather than panic during banking downturns, Buffett has used them to build his ownership stakes. The original stake in Wells Fargo was purchased between late 1989 and early 1990 -- when banks were faltering during the previous banking crisis. During the latest meltdown, Buffett upped Berkshire's ownership in Wells Fargo and US Bancorp, maintained the company's position in M&T Bank, and famously provided preferred-share financing to Goldman. Just last year he sunk $5 billion into Bank of America when it was facing a market freak-out.

The fact that Wells Fargo's price fell after Berkshire initially bought didn't phase Buffett one bit:

Even though we had bought some shares at the prices prevailing before the fall, we welcomed the decline because it allowed us to pick up many more shares at the new, panic prices. Investors who expect to be ongoing buyers of investments throughout their lifetimes should adopt a similar attitude toward market fluctuations; instead many illogically become euphoric when stock prices rise and unhappy when they fall. 

In case you're wondering, yes, this is that classic Buffett "be greedy when others are fearful" sentiment.