Warren Buffett is famous for not investing in technology. He is also famous for avoiding international shares. He also has been known to avoid railroads. But things change. Buffett announced this morning on CNBC, he has bought upwards of $10 billion worth of IBM stock. Although investing in a technology company marks new territory for Buffett, he did not come to the decision quickly. He reports he's been reading IBM annual reports for 50 years and finally decided to pull the trigger.

Buffett, has also invested in internationally and in railroads. Recent years have marked and expansion of Buffett's willingness to invest in areas he traditionally hasn't. This is likely less a divergence from his core investment principles than it is an expansion of his investment circle of competence. Perhaps this will also be an boost to Berkshire Hathway's stock. Time will tell.

The embedded video is of Buffett's appearance on CNBC today. (LINK)

Portfolio:

"Warren Buffett's Berkshire Was Buying as Stock Prices Fell" by Alex Crippen; CNBC

"Warren Buffett Still a Shrewd Investor: Tilson" by Michelle Fox; CNBC

You can buy one of the greatest collections of businesses [Berkshire Hathaway] run by one of the greatest investors [Warren Buffett]—if not the greatest investor—of all time at a 35 percent discount to intrinsic value. - Whitney Tilson

source: Benjamin Taylor

I for one have been a loyal customer of Starbucks for many years. I also admired Starbuck's way of doing business. I always thought of the company as well run. However, during those years, Starbucks's stock remained at lofty prices and it wasn't until the Great Recession that the company's stock became reasonably priced. Since we bought it for the Core Portfolio at the end of 2008, it has returned nearly 336% for us and become our largest holding (as of 11/3/2011).

I believe one of the reasons Starbucks can generate loyalty amongst its customers is the social responsibility the company exhibits. Customers (and investors) want to be associated with a company they can feel good about. I also believe that companies that act responsibly also make good investments. Although Brick Financial does not engage in Socially Responsible Investing (SRI) as it is commonly known, I look for companies that have certain characteristics and these companies are typically good citizens. There has been some research to suggest SRI does in many cases outpace general market investing. The authors find:

In terms of firm level performance, we compare regular funds with replicating portfolios that have been adjusted for unethical companies according to a norm-based screening method. We find that the replicating portfolios perform better than the regular funds, suggesting that certain socially responsible practices affect fund performance positively.

Again, if a company does good, it is likely to be doing well. And vice versa. It is also likely to produce loyal customers like myself. As an example, I purchased my Let's Create Jobs For USA bracelet this morning and will be wearing it proudly.

The other pet peeve I have is when someone takes a position or makes a declaration based on very little information. This person, unlike the previous, has actually done some study. But that so-called study is so lacking thoroughness and depth, no rational person should or would ever draw any serious conclusion from it.

When it comes to investing both these approaches are not only bothersome to someone with my inclination for checking and cross-checking, it can be dangerous to the investor himself. Today I was perusing the CNBC website and noticed two articles about technical analysis. According to Investopedia, technical analysis is “A method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volume. Technical analysts do not attempt to measure a security's intrinsic value, but instead use charts and other tools to identify patterns that can suggest future activity.” However, anyone who has ever seriously studied the record of technical analysis knows it is of little value.

source: CNBC. Click picture to enlarge.

But that’s not what caught my attention on the CNBC site. Notice the headlines of the two articles circled in red. Each gives a totally opposing outlook of the future and both credit technical analysis as the method used to make the conclusion. Now an amateur investor, who is confident (falsely) but who isn’t necessarily vigilant in his research, might read either article and take a stance on the market that’s really ill-informed. Thus dangerous to his portfolio.

Venting over.

But here’s an approach I think is sound when it comes to investing on your own:

1. Don’t pay attention to the talking heads in the financial media.


2. Have some grounding in basic accounting.


3. Exercise a “lazy” approach.


4. Do your own research and make a habit of cross-checking your sources.

source: HowardLake

Let’s face it, life is short and if you’re breathing, you are blessed. Even more so, if you have been fortunate enough to enjoy and benefit from the fruits of this nation, you are mega-blessed. And with those blessings I believe it is only right to pay homage in one form or another.

Poor and restricted are our opportunities in this life; narrow our horizon; our best work most imperfect; but rich men should be thankful for one inestimable boon. They have it in their power during their lives to busy themselves in organizing benefactions from which the masses of their fellows will derive lasting advantage, and thus dignify their own lives…

This, then, is held to be the duty of the man of wealth: first, to set an example of modest, unostentatious living, shunning display or extravagance; to provide moderately for the legitimate wants of those dependent upon him; and after doing so to consider all surplus revenues which come to him simply as trust funds which he is called upon to administer, and strictly bound as a matter of duty to administer in the manner which, in his judgment, is best calculated to produce the most beneficial results for the community…

- Andrew Carnegie, The Gospel of Wealth

The following are some favorite charities of mine. In honor of those who left us due to the events of 9/11/01, please consider these charities or donate to your favorite worthy cause.

Fight Gone Bad 6
On September 17, 2011, CrossFitters from around the world will come together to endure 17 minutes of one of our most grueling workouts in honor of those men and women who have given a lifetime of service and sacrifice. Proceeds go the The Special Operations Warrior Foundation.

Donate here.

NFTE (pronounced "Nifty")
The Network for Teaching Entrepreneurship's mission is to provide programs that inspire young people from low-income communities to stay in school, to recognize business opportunities and to plan for successful futures. Through entrepreneurship, young people discover that what they are learning in the classroom is relevant to the real world. To date, NFTE has worked with nearly 350,000 young people from low-income communities in programs across the U.S. and around the world.

Donate here.

Recently someone followed up with, "I mean, what do you do day to day? How do you help people invest?" Again, what I do is not that complex or exciting. My answer was, "I read." I wasn’t being flippant. It is just really the answer. I read anything I can and have time for about the companies of interest to me, philosophies on investing to philosophies about other disciplines that might help my approach to investing. Charlie Munger, the long-time partner of Buffett calls this a latticework of mental models. This is what I am trying to create with my reading.

In the past, I have talked about how my process, which is influenced by Buffett, Munger, Benjamin Graham and many less well-known investment managers, leads to superior results. That process includes:

• A commitment to a long-term investment philosophy.
• Owning a concentrated portfolio of easy to understand companies that generate high degrees cash and generate high returns on capital/equity.
• Adherence to a value-oriented approach to investing.
• Not deviating into non-profitable areas of the market or areas where competitive advantages are hard to come by (i.e. gold, shorting, or commodity trading).

Clearly we’ve done well:

source: Foliofn.com, Standard & Poors. Disclosure. Enlarge image.

As the chart points out, our Core Portfolio has beaten the market in most calendar years and is ahead of the market so far this year. From the time of inception the portfolio’s annualized total return has been more the double that of the market’s total return (Core: 12.3% vs. S&P 500 Index: 5.1%). Over a typical working lifetime of about 40 years, 12.3% will turn a one-time $10,000 investment into $1,000,000 while a 5.1% investment will become $70,000.

A Day In The Life

The following is an example of how my day transpires. No day is typical. It depends on the season, if school is in, if quarterly earnings are imminent. But this gives a good representation.

• 6:00am: Open emailed version of Wall Street Journal and New York Times and read articles pertinent to the positions in the portfolio. Read any other article that sparks an interest – not necessarily finance related.
• 7:00am – 8:00am: Get daughters ready for and dropped off to school.
• 8:00am: Continue reading articles and any alerts emailed to me regarding our current positions.
• 9:30am: Market opens. Check portfolio to see how our positions opened. Take any action if necessary (which rarely happens).
• 10:00am: Go to the gym.
• 11:00am (bulk of the day): Turn on the financial news, primarily for the ticker. Watch any videos on the web that pique my interest. Google/Twitter search for news relevant to our investments or investments I have my eye on. Listen to recorded quarterly conference call or read financial statements or write a blog post, etc. Hop on the train to the New York and drop in on an investment conference, especially if its free or low cost. Read or watch anything I can find by investment managers who share a value oriented approach.
• 3:00pm: Pick up girls from school.
• 4:00pm: Market closes. See how portfolio shaped up for the day. Check if any positions currently on our watchlist look like buys.
• 4:30pm – 8:30pm: Spend time with family. Help girls with homework.
• 9:00pm: Listen to recorded quarterly conference call or read financial statements or write a blog post, etc. or, Just shut it down for the day and spend that time with family or fun.

The process is not sexy and may be boring but it gets results. There is no secret formula.

UPDATE: 5.9 earthquake rocks Virginia, East Coast By: STAFF AND WIRE REPORTS; The Richmond Times-Dispatch

A 5.9 earthquake in Virginia was felt in Washington, New York City and North Carolina this afternoon. Buildings swayed, and damage reports began trickling in within minutes of the largest quake in Virginia in more than a century.

"What to Do if Your Bank Is Destroyed" By Justin Pritchard, About.com Guide

"Safeguarding Your Finances Against Natural Disasters" By Lynnette Khalfani-Cox; DailyFinance

"Protect your home (and finances) from disaster" By Katherine Reynolds Lewis; CNN Money

"How to Protect Important Documents" by Amy Debra Feldman; Better Homes and Garden

"Conquer the paper piles" by Consumer Reports

"What You Should (and Shouldn’t) Put in a Safe Deposit Box" by Jason Lankow; Mint.com

"Get It Done: Create a Grab-and-Go Box" by Dayana Yochim; Motley Fool

SentrySafe DS0200 Safe 1 Hour Fireproof Combination Safe, 0.8 Cubic Feet, Black

According the country’s leading expert on wealthy households, Thomas J. Stanley, about 80 percent of the top 5 percent of wealthy households (about $1.5 million in net worth) are first-generation affluent. Meaning these households did not inherit any significant portion of their wealth. It was accumulated typically by investing in their own private businesses or the stock of publicly traded companies. How were millionaires able to allocate enough funds to investments that would allow them to become wealthy?

For every 100 millionaires who do not budget, there are 120 who do have a budget. According to Stanley via his book The Millionaire Next Door, those who do not use an official budget, “create an artificial economic environment of scarcity for themselves and the members of their household”. (In other words, they adhere to an imaginary budget.) The millionaire non-budgeters employ the “pay-yourself-first” strategy. And both the millionaire budgeters and non-budgeters save at a minimum of 15% of their gross income and did so even before they were wealthy. Thus, the reason they became wealthy in the first place.

Mint.com is a financial aggregator and budgeting site owned by Intuit, Inc. makers of Quicken and Quickbooks. Although there are plenty of aggregators out there and many work well, I like Mint because a) it’s free, b) it offers a mobile app, also free and c) it offers tools many others do not. For instance, Mint allows users to compare their budgets and spending habits to the typical habits of its other nearly 3 million registered users by city, region, age and other demographic factors. Additionally, since Mint is a part of the Intuit family, its privacy and security measures are tops in the industry. All your information is encrypted.

I want you to use Mint and get familiar with it now because it is one of the best budgeting tools I have seen. You may be someone who has seen budgeting as a waste of time. Hopefully the information regarding millionaires’ budgeting habits will change your mind. Or perhaps you’ve tried to do it, but have not displayed the mental stamina to keep up with it. This tool, addresses both those dilemmas. After you have connected your financial accounts to the Mint website, you’re up and running in seconds.

Then there are those of you who are fastidious budgeters and are unwilling to change your system. “If it ain’t broke don’t fix it”. My parents, more specifically my mother (Yes, I’m calling you out ma!), fit this category. You may recall I wrote of them:

…on a teacher’s and painting contractor’s income, they have been able to save and invest where their capital will kick off enough income in retirement as they earned when they were working. They live modestly but do not need to. They could actually increase their lifestyle substantially if they wanted, but are satisfied making cookies with my daughters, their grandchildren, and going on the occasional vacation.

My parents have an elaborate paper system of shoe boxes, binders, check books, hand-written spreadsheets and envelopes that make up their budget. With such an elaborate system, it takes them and hour to account for a $5 purchase at the corner bagel shop. If my parents were to use Mint, it would essentially perform all those financial gyrations for them in the blink of an eye. Alas, I have not been able to convince my parents to “fix what ain’t broke” by adopting Mint. While their paper system gives them a sense of control over their budget, it is hardly efficient.

While I urge you to follow my parents’ example (and the example of the typical millionaire household) by actually having and following a budget, do not follow their lead regarding their system. Get Minted instead.

Market

"Volatile Stocks to Leave Lasting Scars on Fund Investors’ Psyche" by Laura Keeley; Bloomberg

Cash holdings are at the highest levels since the record in March 2009... The average investor tends to hold large amounts of cash when the markets are at a low and thus miss out on gains, JPMorgan’s Andrew Goldberg said. The previous high of cash as a percentage of portfolios was in October 2002, right before the start of a five-year bull market.

Portfolio:

Two year chart of Coach (COH) vs. the iShares S&P 500 ETF (IVV)

Coach Declares Quarterly Cash Dividend , source: Coach, Inc.

"Coach falls on worries rich will slow spending" by AP; Businessweek

Life:

"Myth-Busting the Black Marriage 'Crisis'" by Jenée Desmond-Harris; The Root

"World of Class Warfare - Warren Buffett vs. Wealthy Conservatives" by The Daily Show with Jon Stewart

Market

"Looking to protect brand abroad, companies tap lobbyists on trademark infringement" by Catherine Ho; Washington Post

"Stocks: Mutual Fund Investors Hate Them the Most Since Oct. 2008" By Mark Gongloff; Wall Street Journal

Equity mutual funds lost a whopping $30 billion last week, according to the Investment Company Institute, their worst week since Oct. 15, 2008, in the depths of the financial crisis. We haven’t had an entire month with more than $30 billion in equity fund withdrawals since March 2009, much less one week.

Portfolio:

ABERCROMBIE & FITCH PROPOSES A WIN-WIN SITUATION by Abercrombie & Fitch, Brand Senses Department

We are deeply concerned that Mr. Sorrentino's association with our brand could cause significant damage to our image. We understand that the show is for entertainment purposes, but believe this association is contrary to the aspirational nature of our brand, and may be distressing to many of our fans. We have therefore offered a substantial payment to Michael 'The Situation' Sorrentino and the producers of MTV's The Jersey Shore to have the character wear an alternate brand. We have also extended this offer to other members of the cast, and are urgently waiting a response.

"Abercrombie offering to pay "The Situation" to not wear its clothes" by CBS News

"Curse of “The Situation”: Abercrombie Shares Dive After Earnings" by Avi Salzman; Barron's

Life:

"Build and Protect Your Company's Brand" by Karen E. Klein; Businessweek

"CrossFit: Where Navy SEALs and Pregnant Soccer Moms Help Each Other Get Ripped " by Greg Ferenstein; Fast Company

The Pew Study reports a stark contrast in the wealth of households by racial group. The median wealth of white households is 20 times that of black households. The study very quickly points to differences in home ownership (non-investment real estate) as the main culprit in explaining the differences in wealth. (Because blacks and Hispanics have very similar financial characteristics and those characteristics highly contrast those of whites and Asians, I will use the stats from the black and white populations for these illustrations.) For instance:

• Only 46% of black households owned their own home, while
• Among white households, 74% owned a home.

So right off we can see black households far behind in the primary asset that contributes to wealth – a home. Owning a home is a pervasive and deep seeded American dream. It has been promoted as the sure way to wealth, by our government, our financial advisors, our ministers and any number of late night infomercials. And the above statistic seems to support this idea. Own a home, get rich.

But I am here to say this idea is misguided. It represents one of the biggest fallacies of wealth accumulation in existence. Home ownership is not a panacea. In fact, if pursued to the exclusion of other assets, especially financial assets, it can be an albatross.

To explain what I mean, let’s look deeper into the stats and include those from wealthy households regardless of race. For blacks and whites alike, home equity made up the lion’s share of net worth. For blacks however, owning this asset (or not owning it), proved much more contributory to the rise, fall or existence of net worth. For example:

• For black households that owned a home, home equity made up 56% of its net worth.
• For white households that owned a home, home equity made up 38% of its net worth.

White households tend to be more diversified than black households. Thus they were able to better withstand the downturn in the real estate market experienced of the last few years. In fact, many black households bought at the peak of the real estate bubble during the days of 110% financing and easy credit. Another study conducted by Pew tells us that 35% of black home owners are under water on their mortgage, meaning they owe more on their mortgage than their home is worth. “Only” 18% of white home owners are in this situation.

Being a little more diversified (not too much) protects wealth. Something the very wealthy, regardless of race, have figured out. According to the latest Survey of Consumer Finances:

• Of households in the top 5 percent of wealth (usually $1.5 million or more in net worth), 98% own their own home, however, home equity makes up only 15% of their net worth.

Blacks who are financially upwardly mobile, for lack of a better term, have caught on that home ownership is a great tool for wealth accumulation. But somehow, the forest was missed for the trees. Home ownership if all goes well can be a financial benefit, but in comparison to other assets available in the marketplace, real estate falls way way short on delivering functional (read: spendable) wealth. That usually comes in the form of stock, bonds, cash and business ownership. I will explore those differences in a later post. The next post however, I will look at the differences among racial groups in unsecured debts and ownership of other tangible assets like cars.

Market:

"Tax My Fortune! Please! Why Warren Buffett Should Volunteer to Pay Higher Taxes" by Daniel Gross, Contrary Indicator; Yahoo! Finance

Paying a few billion dollars in taxes that it isn't required to would allow General Electric, and any other company that follows suit, to do what most Fortune 500 firms haven't been able to do since the 1990s: claim the moral high ground. Just as a self-taxing Buffett would, a self-taxing company would garner a huge amount of publicity and positive reputation-building.

"That market plunge was so last week" by Bloomberg; Pensions and Investments

Portfolio:

"Coffee Wars: Is Dunkin’ Donuts More Valuable Than Starbucks?" by Stacy Curtain, Daily Ticker; Yahoo Finance

"Dunkin' Launches K-Cups; Starbucks Soon to Follow" by Karlene Lukovitz; Mediapost

"Starbucks CEO to DC: You've been cut off" by Charles Riley: CNN Money

Life:

"7 Tips for Writing E-mails That Won't Get Deleted" by Jill Konrath; Inc Magazine

"How to Talk with Your Children About Sex" by Planned Parenthood

"I ain't talking 'bout rich, I'm talking 'bout wealth. Wealth is passed down from generation to generation. You can't get rid of wealth. Rich is some shit you can lose with a crazy summer and a drug habit." - Chris Rock

A few weeks ago researchers at Pew Research Center released a study on the wealth disparity among racial groups in the U.S. Here are the highlights from the study:

• The median wealth of white households is 20 times that of black households and 18 times that of Hispanic households.
• The net worth of Hispanic households decreased from $18,359 in 2005 to $6,325 in 2009. The percentage drop—66%—was the largest among all groups.
• The net worth of black households fell from $12,124 in 2005 to $5,677 in 2009, a decline of 53%.
• The drop in the wealth of white households was modest in comparison, falling 16% from $134,992 in 2005 to $113,149 in 2009.

While these statistics are nothing new, they should be of concern to all of us. There is a large portion of our population whose wealth is not substantial enough to participate fully in all our country has to offer. But instead of lamenting the political structure or the legacy of American racism and their role in “the gap”, starting tomorrow I want to take the next few posts to look at things we can control using the Pew study as a guide. For example, I want to examine the differences in the approach to wealth accumulation among ethnic/racial groups. What works, what doesn't. Stay tuned.

Market:

Stop Coddling the Super-Rich by Warren E. Buffett; New York Times

While the poor and middle class fight for us in Afghanistan, and while most Americans struggle to make ends meet, we mega-rich continue to get our extraordinary tax breaks.

Portfolio:

Supercharging Android: Google to Acquire Motorola Mobility by Larry Page, Google CEO; The Official Google Blog

Life:

Wealth Gaps Rise to Record Highs Between Whites, Blacks, Hispanics by Rakesh Kochhar, Richard Fry and Paul Taylor; Pew Research Center

"Back-to-School Special: 5 Tips on Picking a Good School" by Andrew J. Rotherham; Time

A favorite Benjamin Franklin axiom is “Small strokes fell great oaks”. Meaning small actions, done over and over again over a long period of time, can have a meaningful and substantial impact. This is certainly the case when it comes to personal finances. Small savings here and there add up, or I should say, compound up.

One of the things I feel anyone can do to save a few bucks, here and there, over a long period is to change your own oil. It’s really a simple thing to do once you learn how. So today’s Payday Challenge is to change your own oil.

Before I get into the financial benefit of changing your own oil, let me address the most common argument against doing it: time. The common belief is going to get your oil changed at a quick lube place or a local service station saves time. Really? ‘Cause that is simply not my experience. The closest quick lube is a few miles from my house. The ride alone takes 10-15 minutes and that’s if I don’t catch any red lights on the way. Once there, for some reason the “10 minute oil change” advertised on the side of the building never seems to pan out. There’s typically a line and by the time the technicians have finished upselling me on some “Executive Service” of wiper-blade changes and new fuzzy dice for my rear view mirror, I’ve been there a half hour or more. When I have finally returned home, I’ve spent nearly an hour of my day.

A semi-experienced do-it-yourselfer however can change her own oil in 5 and certainly no more than 10 minutes without ever leaving her driveway. Now, that 45 to 60 minutes spent going to and from the quick lube spot may be worth it not to have to get a little dirty. But there’s always soap and water to remedy that situation.

Time savings aside, there is a real money savings to changing your own oil. The way I figure it, a regular oil change, with no added services typically costs about $40 in my area. On the other hand, I can purchase a 5-liter jug of Castrol High Mileage for $25 and change the oil myself. Now a $15 savings may hardly seem worth it. I mean 15 bucks barely buys a large buttered popcorn and small Diet Coke at the movies. But if you were to forego the movie popcorn and instead place the savings in a well-invested portfolio of stocks, it would make a hearty difference in your wealth over the long haul.

How long do you plan on being a driver? For most people, it’s at least 50 years. If you were to change your oil 4 times per year, invest the $15 savings in a general stock mutual fund (which return about 11% historically), at the end of your driving life, you’d have saved over $100,000. That’s the price of two or three luxury-ish cars over that period. If you were lucky enough to find an advisor or fund able to get you returns in the 15% annualized range (not unheard of), you’d have saved about $433,000 over your driving life.

Would you be willing to get a little dirt under your nails for $400,000?

Yes, fifty years is a long time. But that misses the point. Small savings, in several areas of your life, whether it be changing your oil, reducing the minutes on your cell phone, clipping coupons, foregoing a night out drinking or whatever - small changes over time mean a lot and when added together can amount to substantial savings in relatively short order. Imagine you could find 10 other cost saving actions of equal measure. Now we’re talking $4 million. Nothing to sneeze at.

Market

"Why I'm Still Buying Stocks" by Knight Kiplinger, Editor in Chief, Kiplinger publications

Portfolio:

Forest Laboratories Sends Open Letter to Shareholders

"Forest Labs: Proxy Firm Backs Its Entire Board Slate" by Wall Street Journal

"Forest Labs CEO Won’t Be Barred on U.S. Government Contracts, Company Says" by Jef Feeley; Bloomberg

Life:

"Sesame Workshop: Bert And Ernie Just Friends, Have No Sexual Orientation" by Eyder Peralta; NPR

"How Obama Can Win The Fall" by Andrew Sullivan; The Daily Beast

"Whatever You Do, Don't Buy an Airline Ticket On …" by Scott McCartney; Wall Street Journal

"I blame myself... for having slipped into an extravagant way of life which I hadn't the temperament or capacity to enjoy. I quickly convinced myself that the true key to material happiness lay in a modest standard of living which could be achieved with little difficulty under almost all economic conditions." - The Memoirs of the Dean of Wall Street by Benjamin Graham.

Market

"Financial Turmoil Evokes Comparison to 2008 Crisis" by Nelson D. Schwartz; New York Times

It [now vs. 2008] feels completely different. I don’t think there is a U.S. debt crisis right now, and European debt is not held as broadly as mortgage debt or derivative debt was back in 2008. The prospect of a 2008-like drop in the market is remote. - Larry Kantor, the head of research at Barclays Capital.

"Looking for the bottom" by Buttonwood; The Economist

How does one tell when the markets are cheap?... The best measure is the cyclically-adjusted p/e ratio which averages profits over a decade and pointed to market tops in 1929 and 2000, as well as the early 1980s. According to Professor Shiller, the ratio was 20.7 at the end of last week, whicn makes it around 19.5 after yesterday's fall. That is still above the long-term average of 16.4. The dividend yield is between 2 and 2.5%, on the FT's various measures; even adding 0.5-1% for buy-backs doesn't make that look cheap.

Portfolio:

"Target and the New Frugal " by Michael Shulan; Seeking Alpha

"Target, other retailers deliver solid sales gains" by Thomas Lee; Star Tribune

Life:

"Want to Remember Everything You'll Ever Learn? Surrender to This Algorithm" by Gary Wolf; Wired Magazine

"Is Frugality Dead?" by Robyn Griggs Lawrence; Mother Earth News

Don’t be duped. Monday, after Standard and Poors downgraded the nation’s debt, for what seems to be highly political reasons instead of financial ones, the Dow Jones Industrial Average declined 634 points. The headlines the next morning in the Wall Street Journal read, “Downgrade Ignites Global Selloff”. Of course, there were similar headlines around the news-scape.

Now if you read these headlines with little to no context, you might be ready to cash in your 401k and bury your money in the back yard. You’d reason, “634 points?!?! The sky must be falling. Better get liquid!” In fact, I know some of your financial advisors have even advised you to move your long-term money to cash. Excuse me but this is really awful advice, especially for your long-term funds.

Context is what is needed. Although a 600+ point drop is significant, it hardly matters. The drop on Monday represented a 5.5% decline. That is not even close to making the top 20 percentage drops in the DJIA’s history. But the headlines would have you believe otherwise. It's percentages that matter, not points. The market, as a rule, goes up and down… daily. From 1926 to 2002, the S&P 500 was up 52% of the trading days and down 46%. There was little change the other 2% of the trading days. Like I said, up and down. Deal with it.

Your asset allocation decisions are important when it comes to managing the volatility in your portfolio. I won’t get into that much in this post except to say, your long-term money should typically be in stocks. Your short-term money should typically be in bonds and cash (treasuries). If you have that squared away, volatile days like these last few are buying opportunities and a chance to make money. Not sell out of misguided fear and lock in unnecessary loses.

Market:

"20 Largest Percentage Losses in DJIA History" by FoxBusiness.com

"The Revenge of the Rating Agencies" by Jeffrey Mann; New York Times

Portfolio:

One year chart of eBay (EBAY) vs. the iShares S&P 500 ETF (IVV)

"Stocks at 'fire sale' prices after bloodbath" by Hibah Yousuf; CNN Money

Life:

CrossFit Sports Series WOD-SUP Queens by CrossFit, Inc

The Debt Cieling, The Tea Party and Fuzzy Math

"Where the tea party is wrong" by Jeanne Sahadi; Cnn Money

"Reactions to the Debt Deal" by Justin Lahart, Wall Street Journal

I could end the deficit in five minutes. You just pass a law that says that anytime there is a deficit of more than three percent of GDP all sitting members of congress are ineligible for reelection. - Warren Buffett

"'46% in U.S. don't pay taxes' only half the story" by Joe Garofoli; San Francisco Chronicle

"Spending AND Taxes Got Us Into This Mess, And Only BOTH Can Get Us Out" by Chad Brand; Peridot Capitalist

To counter one of the most common rebuttals to this conclusion (that taxes are too high) consider that federal taxes today are at their lowest point since 1950 (again, as a percentage of GDP). In order to balance the budget, we need to close an annual deficit of $1.4 trillion, the product of $3.6 trillion in spending versus just $2.2 trillion in tax collections. If we do not raise taxes at all, government spending would have to be cut by that $1.4 trillion figure, which would be a cut of 40% (and is impossible).

Portfolio:

"Has Starbucks had enough of laptop loungers?" by Chris Matyszczyk; CNET News

Life:

"The Six Levels of Trust" by Carol Kinsey Goman; Forbes

"Jay-Z and Kanye West's 'Watch the Throne': Track-by-Track Review" by Erika Ramirez; Billboard

The Downgrade:

On Aug. 5, 2011, Standard & Poor's Ratings Services lowered its long-term sovereign credit rating on the United States of America to 'AA+' from 'AAA'. The outlook on the long-term rating is negative.

...the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges...

S&P downgrades the credit rating of the United States (link).

David Beers, Standard & Poor's Global Head of Sovereign Ratings, and John Chambers, Chairman of the Sovereign Ratings Committee, explain our rationale for lowering the rating. (video: 18:23 minutes)

Market:

"Buffett: US Rating Still AAA, No Matter What S&P Says" by Becky Quick; CNBC (link)

Warren Buffett says there's no question that the United States' debt is still AAA and that he's not changing his mind about Treasurys based on Standard & Poor's downgrade. "If anything, it may change my opinion on S&P," the legendary investor said.

"How will the fallout of the U.S. downgrade affect you?" by Greg Gardner; Detroit Free Press (link)

"Standard & Poor's Defends Lowering U.S. Credit Rating" by David Kerley and Dan Arnall; ABC News (link & video)

Portfolio:

'Leucadia National Corporation Stock Downgraded (LUK)" by The Street Wire (link)

"Coach Reports Robust Results" by Zacks Equity Research (link)

Life:

"Fatherless to Fatherhood" documentary spot on CNN.com (video)