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.

All You Need Is a Glass of Water

“Growing up, The Glass of Water Technique was my go-to technique. I found it to be very successful for those times I felt sick. For example, if I had a stomach ache I would go into my level and energize a glass of water. Then, while drinking the water, I would tell myself, “This is all I have to do to rid myself of this stomach ache.” I would also imagine myself feeling healthy and strong after I drank the energized glass of water. And it worked every time!”

More recently, I used this technique to revive a plant of mine. I bought a plant, that I’m sorry to say I was neglecting and one day I noticed that my little plant was not doing so well. That night I decided to energize a glass of water and give it to the plant. As I watered the plant with the energized water, I pictured the plant growing big and strong. I have been doing this for a couple of days now and I am proud to report that my plant is look more alive than ever!

The Glass of Water technique is also used whenever you need information or guidance. It is excellent for making decisions, finding misplaced objects and gaining a deeper understanding of life’s challenging situations. When we do not know the solutions to problems, we lack the necessary information. Once we have enough information, answers and solutions usually become obvious.

Here is an explanation of The Glass of Water Technique.

The Glass of Water exercise is a technique used for solving problems and goal achievement.

• At night, just before retiring, get a water glass and fill it with water. While drinking approximately half of the water, close your eyes, turn them slightly upward, and say to yourself, “This is all I need to do to find the solution to the problem I have in mind.”
• Then, put away the remaining half glass of water, go to bed and sleep.
• In the morning, upon awakening, drink the remaining half-glass of water, then close your eyes, turning your eyes slightly upward, and say to yourself, “This is all I need to do to find the solution to the problem I have in mind.”
• With this programming, you may awaken during the night or in the morning with a vivid recollection of a dream that contains information that you can use for solving the problem, or during the day you may have a flash of insight that contains information that you can use for solving the problem.

Remember with The Glass of water technique you enter your level automatically as you close your eyes and turn them slightly upward while drinking the water. Also, get creative with your Silva Method Techniques…I used it to revive my plant.

From silvamethodlife.com

Warren Buffett Buys This With His Billions .. And It Makes Him Happy

With an estimated fortune of $46 billion, Warren Buffett can buy pretty much anything he wants. Unlike many of his fellow billionaires, however, the world’s second-richest man has no interest in expensive symbols of wealth.

He told CNBC and Yahoo Finance’s “Off the Cuff” that he’s “never had any great desire to have multiple houses and all kinds of things and multiple cars.” (See the video here.)

Buffett, who famously still lives in the modest Omaha house he bought for $31,500 in 1958 and drives a Cadillac he bought “about 6 or 7” years ago, said his idea of a perfect day involves being alone with no interruptions so he can read and think.

Flipping through his nearly empty appointment book, Buffett told CNBC Squawk Box co-host Becky Quick his money does buy him one thing he values very much: his freedom. For him, freedom is the key to a happy life.

Reading plays a big role in that happy life. Buffett said he starts every morning by reading two of the five daily newspapers he devours each day, starting with the Omaha World-Herald. (His company bought it late last year, even though he's said the newspaper industry faces a "terrible" future.)

Buffett often jokes that he reads corporate annual reports with the same intensity that other men reserve for Playboy magazine.

Buffett told Becky he has a “disgusting pile” of books by his chair. “I just keep going at them and I never get tired of reading.” Most of those books are non-fiction. He especially likes biographies.

While Buffett prefers reading printed words on paper, he’s also a big fan of the Internet because it provides instant access to the sometimes obscure information he uses to make investment decisions. “The amount of time that it’s freed up for other things is just incredible.”

His one luxury is a time-saving private jet, “the only thing that I do that costs a lot of money.” Even though he loves the plane, he would pay even more to give up his jet but keep the Internet. “I would gladly pay half my net worth just to have that kind of information available to me. They haven’t figured out how to charge me what it’s worth. That’s one of the problems they’ve got.”

Instead, he’s gradually donating most of that enormous net worth to the Bill & Melinda Gates Foundation and other charities, while making sure he has a few billions left for books ... and other necessities.

From cnbc.com

Some People Just Don't Have What It Takes To Make A Great Real Estate Investor

As I watch the election results come in from around the country, it’s hard not to contemplate all of the hard work each of the candidates invested to get to this point.

The thought of organizing a campaign of that magnitude while doing interviews, preparing for debates, managing campaign personnel, strategizing, etc. seems overwhelming for a single candidate.

Most people simply don’t have what it takes to ever legitimately run for elected office.

However, certain individuals have the skill sets, temperament and personality to endeavor to a nationally elected position.

I think the same holds true for real estate investors. There are certain character traits that are inherent in most real estate investors that enable them to be successful in what they aspire to. Just last week I was having lunch with an old college roommate who said something that I thought was quite profound.

As much as he was struggling to figure out what his next career move was going to be, he said he knew he wasn’t cut out to run his own business. While he is a very intelligent, hard-working individual, he knew his natural skill set simply doesn’t lend itself to being a business owner.

I think the same could be said about some people when it comes to real estate investing. Some folks simply don’t have the character traits that make a great investor.

Now when most people think about the kinds of adjectives that describe a successful investor, they think of words like creative, tenacious, self-starter, salesman, negotiator, persistent, and I would definitely agree with them. These are definitely the type of qualities in an individual that will help them be good real estate investors. However, there are three character traits that are rarely discussed, but I would consider extremely valuable as a real estate investor:

The Three Essential Character Traits of Successful Real Estate Investors

Intuition – Knowing where to buy, what to buy and who to sell to is paramount for any real estate investor. While any smart investor will study existing data carefully before developing an investing strategy, there is certainly an element of intuition involved with any real estate decision. Do I accept this offer or wait for another higher one? Do I buy in this neighborhood or do I think it will decline over the next several years?

Making these types of buying and selling decisions can be a lot like playing poker. You never have all of the facts, but you make the best decision based on the information available as well as what your gut is telling you.

Adaptability – I wrote a blog last week about the speed at which the real estate industry changes. Any investor that wants to stay profitable and relevant needs to continually stay abreast of changing trends and adapt business models to stay current. Having the ability and foresight to make these types of strategic changes midstream is what sets successful investors apart from the rest.

Patience — While patience is rarely regarded as an important quality in real estate investing circles, I think it is one of the most important ones. Whether it be waiting to buy the right deal or waiting to get the right price on a sale, learning to be patient with your investments is of utmost importance. Too many investors have purchased bad properties because they weren’t willing to wait for the right ones.

Investing in real estate is not rocket science. It does not even take a college education to be good at it. Some folks are naturally talented while other develop their investing skills over time. Either way, knowing your strengths and weaknesses as an investor is critical to improving your chances at prospering in this business.

From biggerpockets.com

Book Review: 'The Warren Buffett Portfolio'

Books on Warren Buffett dominate the bookshelves at the investment section of bookstores. Among the sea of Warren Buffett books, Robert G. Hagstrom's name stands out. He has written three books: "The Warren Buffett Way," "The Warren Buffett Portfolio" and "The Essential Buffett."

According to Hagstrom, his second book, "The Warren Buffett Portfolio," is meant to be a companion, not a sequel, to "The Warren Buffett Way." He claimed he unwittingly passed lightly over two important areas: portfolio management and intellectual fortitude in The Warren Buffett Way. TheWarren Buffett Way gives the reader tools to pick common stocks wisely, and The Warren Buffett Portfolio shows you how to organize them into a focus portfolio and provides the intellectual framework for managing it.

I introduce readers to Hagstrom's second book The Warren Buffett Portfolio.

Takeaways from The Warren Buffett Portfolio

- Focus Investing: Choose a few stocks that are likely to produce above-average returns over the long haul, concentrate the bulk of your investments in those stocks and have the fortitude to hold steady during any short-term market gyrations.

- Phil Fisher was known for his focus portfolios; he always said he preferred owning a small number of outstanding companies that he understood well to owning a large number of average ones, many of which he understood poorly.

- Using the tenets of the Warren Buffett Way, choose a few (10 to 15) outstanding companies that have achieved above-average returns in the past and that you believe have a high probability of continuing their past strong performance into the future. Allocate your investment funds proportionately, placing the biggest bets on the highest-probability events. As long as things don't deteriorate, leave the portfolio largely intact for at least five years (longer is better), and teach yourself to ride through the bumps of price volatility with equanimity.

- Buffett has a different definition of risk: the possibility of harm or injury. And that is a factor of the "intrinsic value risk" of the business, not the price behavior of the stock. The real risk, Buffett says, is whether after-tax returns from an investment "will give him [an investor] at least as much purchasing power as he had to begin with, plus a modest rate of interest on that initial stake."

- The optimal portfolio is a focus portfolio that stresses big bets on high-probability events, as opposed to equally weighted bets on a mixed bag of probabilities.

- Measure management this way: 1) Review annual reports from a few years back, paying special attention to what management said then about strategies for the future. 2) Compare those plans to today's results: How fully were they realized? 3) Compare the strategies of a few years ago to this year's strategies and ideas: How has the thinking changed? 4) Compare the annual reports of the company you are interested in with reports from similar companies in the same industry. It is not always easy to find exact duplicates, but even relative performance comparison can yield insights.

- Stock prices disengage from the intrinsic value of a business for various reasons, including psychological overreaction as well as economic misjudgment. Focus investors are perfectly positioned to take advantage of this mispricing. But, to the degree they incorporate macroeconomic or stock market predictions inside their model, focus investors will diminish their competitive advantage.

- For Buffett, investing is a series of "business" pitches and, to achieve above-average performance, he must wait until a business comes across the strike zone in the "best" cell. Buffett believes investors too often swing at bad pitches, and their performance suffers. Perhaps it is not that investors are unable to recognize a good pitch — a good business — when they see one; maybe the difficulty lies in the fact that investors can't resist swinging the bat.

From gurufocus.com

Related Books

The Warren Buffett Portfolio: Mastering the Power of the Focus Investment Strategy

The Warren Buffett Stock Portfolio: Warren Buffett Stock Picks: Why and When He Is Investing in Them

Book Review: 'The Warren Buffett Way'

Books on Warren Buffett dominate the bookshelves at the investment section of bookstores. Among the sea of Warren Buffett books, Robert G. Hagstrom's name stands out. He has written three books: The "Warren Buffett Way," "The Warren Buffett Portfolio," and "The Essential Buffett."

According to Robert Hagstrom, his second book, "The Warren BuffettPortfolio," is meant to be a companion, not a sequel, to "The Warren Buffett Way." He claimed he unwittingly passed lightly over two important areas: portfolio management and intellectual fortitude in The Warren Buffett Way. It gives the reader tools to pick common stocks wisely, and The Warren Buffett Portfolio shows you how to organize them into a focus portfolio and provides the intellectual framework for managing it.

I introduce readers to Hagstrom's first book, The Warren Buffett Way.

Takeaways from The Warren Buffett Way

Business Tenets = basic characteristics of the business itself

1. Is the business simple and understandable?

- Understand the revenues, expenses, cash flow, labor relations, pricing flexibility, and capital allocation needs of every single one of your holdings.

- Investment success is not a matter of how much you know but how realistically you define what you don’t know.

2. Does the business have a consistent operating history?

- A steady track record is a relatively reliable indicator. When a company has demonstrated consistent results with the same type of products year after year, it is not unreasonable to assume that those results will continue.

- Avoid purchasing companies that are fundamentally changing direction because their previous plans were unsuccessful. Undergoing major business changes increases the likelihood of committing major business errors.

- Avoid businesses that are solving difficult problems. Turnarounds seldom turn.

3. Does the business have favorable long-term prospects?

- A franchise as a company whose product or service 1) is needed or desired, 2) has no close substitute and 3) is not regulated.

- A franchise that is the only source of a product people want can regularly increase prices without fear of losing market share or unit volume.

- A franchise has the ability to survive economic mishaps and still endure. A great company is one that will be great for 25 to 30 years

Management Tenets = important qualities that senior managers must display

4. Is management rational?

- The most important management act is allocation of the company’s capital.

- Deciding what to do with the company’s earnings — reinvest in the business, or return money to shareholders — is an exercise in logic and rationality.

- If the extra cash, reinvested internally, can produce an above-average return on equity — a return that is higher than the cost of capital — then the company should retain all its earnings and reinvest them.

- A company that provides average or below-average investment returns but generates cash in excess of its needs should return the money to shareholders.

- Dividends put reinvestment risk in the hands of shareholders.

- Repurchases are preferred as shareholders are rewarded twice, first from the initial open market purchase and then from the positive effect of investor interest on price.

5. Is management candid with its shareholders?

- Likes managers who report their companies’ financial performance fully and genuinely, who admit mistakes as well as share successes, and who are in all ways candid with shareholders.

- Data should be disclosed in a manner that helps the financially literate readers answer three key questions: 1) Approximately how much is this company worth? 2) what is the likelihood that it can meet its future obligations? and 3) how good a job are its managers doing, given the hand they have been dealt?

- Managers who confess mistakes publicly are more likely to correct them.

- The CEO who misleads others in public may eventually mislead himself in private.

6. Does management resist the institutional imperative?

- The institutional imperative is the lemming-like tendency of corporate management to imitate the behavior of other managers, no matter how silly or irrational that behavior may be.

LeBron James earns praise from Warren Buffett for business mind

LeBron James is earning high praise in high places.

Warren Buffett, 82, is the second-richest man in America, a person whose business acumen has been lauded the world over. Worth an estimated $46 billion, Buffett does not take his investments lightly, and he has taken an interest in 27-year-old James of the Miami Heat.

“You have to get to know him,” Buffett said, according to The Miami Herald. “LeBron’s not initially really talkative. He’s savvy. He’s smart about financial matters. It’s amazing to me the maturity he exhibits. I know that if I had been famous at that age, I would have had trouble keeping my feet on the ground.”

James has a net worth of $110 million and was the fourth highest-paid athlete in 2012,according to Forbes.com. Tiger Woods—who was listed at No.3—became the first athlete to earn $1 billion dollars, and James wants to be next. He certainly has people in his corner who know about accumulating wealth. Not many people can count Microsoft chief executive Steve Ballmer, Dallas Cowboys owner Jerry Jones and rap mogul Jay-Z as friends.

MORE: Knicks win over Heat offers temporary relief

James didn’t attend college, famously making the leap from high school to the NBA without missing a beat. That has had no bearing on his ability to make savvy business moves—and it doesn’t hurt to turn to Buffett for advice every now and then.

At the root of James’ place as the most bankable NBA player is his personality and prodigious talent. His first season with the Miami Heat, which ended in an NBA Finals loss to the Dallas Mavericks, resulted in a 17 percent increase in the Heat franchise’s value, pushing it to $425 million, according to Forbes. That number increased to $457 million after James’ second season in Miami, in which the team finished with an NBA championship win over the Oklahoma City Thunder. James also helped add $111 million to the net worth of team owner Micky Arison.

The best season of James’ NBA career did more than earn the NBA’s most recognizable player his first championship—it also added validation that only increases his earning power. James currently holds lucrative endorsement deals with Nike, Coca-Cola, State Farm, McDonald’s and Samsung, and the list is bound to grow. James’ most publicized venture was the deal with Fenway Sports Group that made him a minority owner in the British soccer team Liverpool.

But James made it known he will be selective in business moves, something he has already done with his pool of friends and advisors.

“I’ve got a lot going on right now,” James said. “I’m not looking for too many new opportunities—unless it’s a good one.”

From aol.sportingnews.com

Zong Tops China Billionaires as Communist-to-Capitalist

Twenty-five years ago, when Zong Qinghou was 42, he made his living selling soft drinks and popsicles to schoolchildren. He says he earned about $8 a month -- less than a third of China’s average wage at the time -- and was so broke that he once slept in a tunnel under the streets of Beijing rather than spend on a hotel.

Today, Zong, 67, is still selling soda -- and lots of other things -- as the wealthiest man in mainland China, Bloomberg Markets magazine reports in its December cover package, “The World’s Richest People.” His net worth of $20.1 billion as of Oct. 5 ranks him No. 30 in the world, according to the Bloomberg Billionaires Index. Supermarkets stock the juice, soda and bottled water his Hangzhou Wahaha Group Co. produces, and doting Chinese parents buy his baby formula and children’s clothes. In all of Asia, only Hong Kong property developers Li Ka-shing and Lee Shau-kee and Indian industrialist Mukesh Ambani are richer.

Even in a country that has exploded in wealth and created a new economic ruling class, Zong’s story stands out. His rags-to- riches tale is remarkable not just for its trajectory but for the way he has thrived amid China’s seemingly impossible conflation of capitalism and communism.

Zong, who didn’t attend high school, lived on a farm commune from 1964 to 1978 during Mao Zedong’s Cultural Revolution. He read the Communist revolutionary’s books on leadership and learned about enduring through struggle. After Deng Xiaoping, the architect of China’s drive toward a market economy, came to power, Zong took over a grocery store in 1987 with two retired teachers and a $22,000 loan from relatives.

Frugal and Autocratic

Now Wahaha’s chairman, Zong remains a frugal and autocratic manager, traits he honed in approving his first shop’s every expense, down to the purchase of a broom. He often sleeps in a sixth-floor office at Wahaha’s gray headquarters in Hangzhou, the capital of Zhejiang province. For lunch, he heads downstairs to the canteen, furnished with formica tables, where he eats the same food as his workers.

“When you are poor, you’ll have to think of ways to be better off,” says Zong, recalling his early years while chain- smoking Davidoff cigarettes outside Beijing’s News Plaza Hotel. “That experience helps me to endure.”

People passing the five-star hotel a few blocks from Tiananmen Square don’t give the nation’s top billionaire a second glance. He certainly doesn’t advertise his wealth. He’s dressed in a dark jacket and slacks and plain black shoes, all made in China. He says he bought the footwear only after someone told him his old pair was wearing out.

Swiss Watch

He has no bodyguards; his only escort is the manager of Wahaha’s Beijing operations.

“I don’t need expensive clothing,” he says.

Zong’s sole nod to his status is his $48,000 Vacheron Constantin watch, which he bought in Switzerland to replace an old Rolex.

“Other people say Rolex is for the newly rich,” he says, smiling.

Zong is prospering amid China’s booming economy and burgeoning middle class. In the past three decades, growth has averaged 10.1 percent a year, lifting hundreds of millions out of poverty.

Wahaha, which means laughing baby in Mandarin, attracts these new consumers. Flavored, nutritionally enhanced milk caters to families with young kids, while mineral water and iced green teas target adults.

’Juicy Milk’

“Our juicy milk was a big hit,” Zong says, of his drink that combines juice and milk.

Wahaha generated $11 billion in sales last year, with a 7.2 percent share of China’s soft drink market. It’s No. 3, behind Coca-Cola Co. and Hong Kong-listed Tingyi (Cayman Islands) Holding Corp. (322), according to London-based Euromonitor International Plc. Zong estimates that earnings at his closely held Wahaha will soar 60 percent to $1.6 billion this year from $1 billion in 2011.

Such a surge would make Zong even richer. He and his wife, Shi Youzhen, and their daughter, Kelly Zong, hold about 80 percent of the company. Zong disclosed the stake to Bloomberg News in September, more than doubling previous estimates of his wealth. (The Bloomberg Billionaires Index operates under the rule that billionaire fortunes are inherently family fortunes.)

Zong’s net worth is based on the average enterprise value- to-sales and price-to-earnings multiples of three publicly traded peers, using Wahaha’s profits, plus $1.9 billion in cash from estimated dividends, market performance and taxes.

Raising Profile

Zong is likely to use his status as China’s richest person to pursue acquisitions overseas, says Zhang Lu, an analyst at Capital Securities Corp.

“Given the fact that Wahaha is already a well-known brand domestically, disclosing his share and wealth would help to boost the global profile of both Wahaha and Zong himself,” she says.

Zong joins four other mainland Chinese billionaires in Bloomberg’s list of the world’s 200 richest people. Wang Jianlin, 58, chairman of property developer Dalian Wanda Group, is the second wealthiest, with a net worth of $9.1 billion as of Oct. 5. Baidu Inc. Chairman and Chief Executive Officer Robin Li, co-founder of the nation’s biggest search engine, is third, with $8.4 billion. Ma Huateng, 41, of Tencent Holdings Ltd., the country’s largest Internet company by market value, is fourth, with $7 billion. Longfor Properties Co.’s Wu Yajun, 48, the Beijing-based developer who’s the richest woman in China, is worth $6.4 billion and is fifth.

Warren Buffett's Timeless Advice: 'Don't Make This Mistake'

Warren Buffett has some timeless advice for investors that he can't repeat too many times.

At the end of his live, two-hour appearance with Becky Quick on CNBC's "Squawk Box" this morning, she gave him a chance to do a free association reaction to a single word: "buy."

Here's his response:

"I say, basically, 'hold.' The idea that the European news or slowdown in this or that or anything like that, that would not cause you to, if you owned a good farm and had it run by a good tenant, you wouldn't sell it because somebody says, 'Here's a news item,' you know, 'This is happening in Greece' or something of the sort.

"If you owned an apartment house and you got to raise the rents a little and it was well located and you had a good manager, you wouldn't dream of selling it.

"If you had a good business personally, a local McDonald's franchise, you wouldn't think of buying or selling it every day.

"Now, when you own stocks, you own pieces of businesses, and they're wonderful businesses. You can pick the best businesses in the world.

"And to buy or sell on current news is just crazy. You're in a wonderful business. You've got people running it for you. You know you're going to do well over five to ten years. And to think news events should cause you to dance in or out of something that's a wonderful game is a terrible mistake.

"So, get into a bunch of wonderful businesses and stay with them...

"I've been buying all my life. I bought my first stock when I was 11-years old and it was about three months after Pearl Harbor, and Corregidor was falling, and they had the Death March at Bataan and all the news was terrible. It was a great time to buy stocks. And I should have held that stock forever, and I've been buying stocks ever since."

From cnbc.com

How big a portfolio do I need to live on dividends in retirement?

How much does one need to invest before one’s dividends pay for basic monthly expenses in retirement? I realize there are a lot of variables, but this is a very general question.

You’re correct that there are a lot of variables, but let’s do some very rough math. We’ll assume you’re retiring today, and for simplicity we’ll ignore taxes (which may not be a big factor anyway, thanks to the dividend tax credit. For more on this my Yield Hog column from this week).

Let’s further assume that your investment portfolio yields 3.75 per cent, calculated as total annual dividends divided by total market value. I didn’t pull this number out of a hat; it’s the yield of my Strategy Lab model dividend portfolio.

Could you construct a portfolio with a higher yield? Absolutely. But in my opinion a diversified portfolio of stocks yielding 3.75 per cent is easily achievable without taking on excessive risk.

Now, we need to determine what your basic expenses would be in retirement, keeping in mind that a lot of costs – raising kids and paying the mortgage, for example – may well be behind you. Let’s assume you can get by on $50,000 for basic expenses such as food, property taxes, clothing, transportation and utilities. Granted, this doesn’t leave room for lavish Mediterranean cruises or a new Lexus every few years, but you won’t be eating cat food, either.

My family of four, for example, lives comfortably on less than that. I know this because I have tracked our expenses for the past several years. I recommend you do the same; it’s the only way to know how much money is actually going out the door. One of the easiest ways to track your spending is to keep all of your bank and credit card statements, and then review them each year to see how much you’ve spent.

Now the question is, how much capital do you need in order to generate that $50,000 in annual income, assuming a yield of 3.75 per cent? The answer is: $50,000/0.0375, or $1.33-million.

Think you could get by on $40,000? You’d need a portfolio of $40,000/0.0375, or about $1.07-million. If you assume a higher dividend yield of, say, 4 per cent, you’d need a portfolio of $40,000/0.04, or $1-million.

You can play around with different scenarios on your own. The general formula is X/Y = Z, where X is your annual expenses, Y is the portfolio yield expressed as a decimal, and Z is the required portfolio value. As long as you know two of those numbers, you can solve for the third.

What about inflation? Well, if you own stocks that raise their dividends regularly, as many pipelines, utilities, banks and consumer companies do, your income will grow and protect you from rising prices.

Bear in mind that most investment professionals recommend that you also allocate a portion of your portfolio to bonds or guaranteed investment certificates. When the stock market takes a dive, you’ll be glad you have them.

Remember, too, that you may well have other sources of income in retirement, including the Canada Pension Plan, Old Age Security, registered savings and, if you’re fortunate, a company pension as well. So you probably won’t have to rely on dividends for all of your spending needs. But having some dividend income in retirement will certainly help.

There are a lot of moving parts here, and this analysis is general in nature and not meant to be taken as specific investment advice. A good financial planner can put together a comprehensive plan that addresses your specific situation.

From theglobeandmail.com

Top 7 Warren Buffett Quotes on Gold Investing

Warren Buffett, the Oracle of Omaha and Chief Executive Officer of Berkshire Hathaway (NYSE:BRK.A), is one of the most famous investors of all time. This billionaire has made so much money that he hardly knows what to do with it, although he has decided that after his passing he would like a sizable portion of his earnings to be dedicated to charity. Still, for all of the successes and endeavors that Buffett has taken on in his lifetime, there is one asset that he never quite warmed up to: gold.

Buffett is well-known for not only his strengths as a businessman, but also for his rather outspoken hatred of gold. The stance is somewhat controversial given the massive popularity of the precious metal that has made millions for investors all around. Also, we have seen other billionaire investors betting big on gold in recent weeks. Nevertheless, Buffett is not the least bit timid about his opposition towards the commodity. We scoured the Internet to bring you the seven best Warren Buffett quotes regarding gold and why he hates it so much.

1. “Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”

2. “The problem with commodities is that you are betting on what someone else would pay for them in six months. The commodity itself isn’t going to do anything for you….it is an entirely different game to buy a lump of something and hope that somebody else pays you more for that lump two years from now than it is to buy something that you expect to produce income for you over time.”

3. “Gold is a way of going long on fear, and it has been a pretty good way of going long on fear from time to time. But you really have to hope people become more afraid in a year or two years than they are now. And if they become more afraid you make money, if they become less afraid you lose money, but the gold itself doesn’t produce anything."

4. “I will say this about gold. If you took all the gold in the world, it would roughly make a cube 67 feet on a side…Now for that same cube of gold, it would be worth at today’s market prices about $7 trillion – that’s probably about a third of the value of all the stocks in the United States…For $7 trillion…you could have all the farmland in the United States, you could have about seven Exxon Mobils (NYSE:XOM) and you could have a trillion dollars of walking-around money…And if you offered me the choice of looking at some 67 foot cube of gold and looking at it all day, and you know me touching it and fondling it occasionally…Call me crazy, but I’ll take the farmland and the Exxon Mobils.”

How The Rich Get Richer And You Can, Too

We all know, innately, how the rich get richer. Money begets money. But how does that actually happen, aside from compounding interest and purely financial factors?

You could take the cynic's view that the game is rigged. But the more accurate answer, backed by research, is that the rich get richer because of great parenting. How rich you become over your lifetime is directly related to how early you capture the basic truths of finance and investing.

You have seen the exception that proves the rule, the rich kid who blows his family's wealth in a generation through poor decisions. Chalk that up to absentee parents. Truly, teaching is the missing link.

According to a report in Time magazine :

In a paper unveiled a few months ago, researchers led by Annamaria Lusardi, professor of economics at George Washington University, found that an early understanding of financial concepts accounts for as much as half of the wealth gap between the affluent and those with low incomes . Lusardi also found an exponential effect: Those who acquire financial understanding early tend to accumulate assets faster and those with more assets tend to keep learning about personal finance because they have more at stake. (Emphasis added)

There are two powerful forces at work here, in terms of how the rich get richer. Let's tease them out so that you can benefit from the knowledge.

First and foremost, how the rich get richer has a lot to do with picking the right parents. Kidding aside, being born into a developed-country household, availing yourself of a quality education at a low relative cost, enjoying the benefits of a healthy diet and a safe childhood, all of these things give a person automatic advantages.

Invest Like Warren Buffett: 3 Ways to Profit Like the Sage of Omaha

In the days leading up to Facebook’s historic (and now infamous) IPO, CEO Mark Zuckerburg pursued Warren Buffet’s sage advice. The young CEO, who’s gone from creating Facebook in his Harvard dorm-room to billionaire in only 8 years, spoke “for hours” with Buffett about how to take the social network public.

And it’s no surprise. As one of the wealthiest people in the world, Buffett is also known for his incredible business acumen and strong philosophies around business, economics, and investing.

What makes him different however, is that most of these philosophies go “against the grain” and collective wisdom of the financial markets.

Here are three of his investing lessons that will help you learn from the master.

1. Invest in Productive, Cash-Generating Businesses

Contrary to most financial managers, Buffett doesn’t recommend investing in currency-backed assets or gold. Especially as a way to hedge inflation.

Instead, he favors productive assets like businesses, farms and real estate. His rationale is that these supposed “safe” investments are actually the riskiest.

The main reason is that these assets actually lose purchasing power over time, while sound productive assets should grow – despite market cycles.

And Buffett has said that the goal for his companies isn’t to simply “make money”.

The goal is to generate more money then you will have to pay in taxes and inflation, so that you can buy more things later than you can with the same money right now.

10 Rules For Multiplying Personal Wealth

I have the privilege of teaching financial planning courses at local colleges and adult learning centers.

One of the things we do in class is recite and write down a set of rules I hope each student can learn to live by.

Here are a few key rules to remember:

Rule 1: Be systematic, unemotional and diversified

This is the very first rule we touch on right from the beginning. There's a popular bumper sticker that says, "I'm spending my grandkids' inheritance."

That whole idea just frustrates me. In some ways, our society's personality is such that if we can spend our money before we die, we've lived a great life. But you can't do that.

Rule 2: Never spend principal

That's the second rule. Inflation has gone above 10 per cent in the US economy five times, and I'd bet you it will happen again.

Rule 3: Never borrow money to buy a depreciating asset

Almost everybody does this at some point. But as soon as possible, and definitely by retirement, you have to get back to a cash basis.

How many people know what a $30,000 car bought on credit costs them at age 25? In retirement dollars, at age 65 and assuming a hypothetical 10 per cent return, that financed car could cost as much as $11,314 a month in potential income. Forever!

So, do you or your children understand what an "investment" in a car really costs you? Yes, I know we all buy cars. But try to imagine what would happen if I got every 25-year-old to forgo just one car purchase and invest that same amount of money in their long-term retirement goals. What a huge difference that could make to their choices at retirement!

Rule 4: Never save money in a spending account

Keep separate bank accounts for saving and spending. You have to save in savings accounts. If you truly want those savings to grow, use an account that helps you leave the money at work, rather than a "slush fund" that's easy to dip into.

People tell me they are saving $545 a month in an account. Yet when I ask them how much they have accumulated after seven years of doing this, their answer is often $1,123 because they spend out of that same account.

It is not a save-to-save account -- it's a save-to-spend account! If you know you're not naturally a disciplined saver, make it harder to get at the money. You'll be doing yourself a favor in the long run.

Rule 5: Use half, save half

Every time you pay off a debt, get a pay raise, get a bonus, or have any excess cash, have fun with half the money, and put the other half toward your long-term goals.

This is one of the best rules, especially for younger people. By following this rule consistently, in ten years, most people are amazed at how much they can save.

Whether you save or not has nothing to do with how much money you make. Either you save or you don't. It's a habit. Make a habit of investing half of any windfall, big or small, right off the top.