How to Buy Stocks and Bonds

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Although TV and Hollywood paint Wall Street as chaotic and mysterious, buying and selling stocks and bonds is really straightforward.  In the age of the Internet, buying and selling has become especially user friendly.  Because most investors use brokers, this post will concentrate on them: later posts will deal with alternatives.

How Brokers Work 

Brokers have many advantages.  Because they have membership on the organized exchanges where stocks trade, they are well placed to act quickly and effectively.  And because of their web of associations, brokers can easily navigate the complexities of bond trading for their clients.  Bonds generally do not trade on organized exchanges.  Instead, in what are called principal transactions, a seller, for instance, offers the bond through a broker to an investment bank, which, after settling on a price, takes ownership of the bond and then finds a more permanent buyer.  As a brokerage client, however, you don’t have this bother.  You simply tell your broker what to do, the broker comes back with a price, and you either agree or reject the trade.

Selecting a Broker

Choose a broker in much the same way you choose a bank. (See this earlier post.)  Most people get recommendations of family or friends.  Your boss, accountant, or banker might offer suggestions.  The Internet can offer guidance, too.  A good place to start is with the Financial Industry Regulatory Authority (FINRA) website, https://www.finra.org. Once you have a list of potential brokers, talk to them or go on line to research the following:

  1. Find out what account size the broker requires.  A high minimum may not be right for you.
  2. Ask for references.  If a broker refuses, that is a bad sign.
  3. How long has the broker been a broker?  It’s a plus if the broker practiced during a difficult market environment, such as 2008-09.
  4. Ask the broker for ideas on how to invest your portfolio.  If the broker responds by questioning you, that indicates that he or she is sensitive to your needs. You can then judge if the broker’s response is appropriate, even if it is not quite what you have considered.  Beware if you get an answer filled with references to hot stocks of the day: it suggests an effort to impress you without much regard for your needs.

Setting Up an Account

 Once you decide on a broker, establishing an account is easy and costs nothing up front.  The broker will need to determine that you are who you say you are and get your personal information, including social security number (for tax purposes).  Post 9/11 laws put to prevent money laundering have made this process more elaborate than it once was, but it remains straightforward.  The broker should ask about the following: the size of your assets, how long you have been an investor, what your objectives are, and what is your tolerance for risk.  Though this may seem intrusive, it is necessary so that the broker can serve you better, for instance, to make recommendations and to warn you when you contemplate an action that the broker feels might conflict with your general goals and preferences.

Types of Accounts

 Once your account is established, the broker will report to you regularly and almost certainly give you online access to review your holdings.  The broker will not only trade at your direction, but will also take custody of the assets you have bought and sold through these trades: the ownership remains yours.  This custody arrangement enables the broker to keep track of the securities, their associated cash flows, dividend and interest payments, and tax reporting.

Brokers are compensated mainly by charging, as a fee, a small percent of the total amount traded each time you buy or sell a stock. With bonds, brokers are paid because the price they bid to buy the bond for themselves is slightly lower than the price they ask when they then sell it to you.  This is called the bid-ask spread.  These fees or spreads are usually a fraction of a one percent of the amount involved in the trade.  So-called discount brokers charge lower fees but provide less comprehensive service.  Brokerage is a highly competitive business and fees remain relatively low with all brokers, certainly lower than they were some years ago.  Still, the expense should encourage you to keep your trading to a minimum.  (There are tax consequences, too, of which more in a coming post.)  There are basically four different sorts of accounts:

  1. Directed Account: (Some brokers call this by a different name.) Such an account effectively leaves all decisions up to you.  You direct the broker on all sells and buys.  Each action incurs a fee.  Full service brokers will offer advice based on their insight and research as well as on the strategy of their firm.  You can take the advice or not.
  2. Discretionary Account: Here, you authorize the broker to buy and sell for you at the  broker’s discretion.  (Discount brokers seldom offer this arrangement.)  Your broker will rely mostly on his or her firm’s research.   Before you begin such an arrangement, you should set out clear guidelines — you can always withdraw this permission or modify specific decisions.  Here, too, you pay a fee for each trade.
  3. “Account Fee Arrangements”: This is what I call such accounts. (They have many different names).  These accounts bill you based on the overall size of your assets but allow you to trade as much as you like without a fee.  Account fee arrangements are best suited to those who, for one reason or another, want to trade frequently.
  4. Margin Account: This arrangement, which can co-exist with any other account structure, enables you to buy securities on credit. The law stipulates how much you have to put down on each transaction and sets rules on the interest you pay on the borrowed portion of your purchase.  If the value of a security bought on margin drops, the broker may ask you for additional funds  (a “margin call”) because the security you have effectively pledged to ensure repayment is now worth less than when you originally pledged it.  Laws govern how margin calls (words investors usually say with a shudder) are handled.  Many tax-advantaged accounts, such as IRAs and 401(k) arrangements forbid margin purchases.

For many investors, especially small investors, mutual funds provide an easy, less costly way to put their money to work in stocks and bonds.  My next post will deal with these and other ways to get your investment dollars to work.

 

Other Alternatives for Savings

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I have used other posts to describe several alternatives for the saver.  In one, I focused on commercial banks, in another on savings banks and credit unions, and a third post on investment clubs.  Here I offer yet another option: U.S. government savings bonds. This post also includes a note on on-line banking.

U.S. Government Savings Bonds

Savings bonds are about as safe an investment as exists.  They guarantee repayment plus interest at a set future date. You can also redeem these bonds, including the accrued interest, before the stated maturity date. Called Series EE bonds, they pay a rate that the Treasury sets each May and November. Once you have bought the bond, that rate is guaranteed for its stated term — up to 30 years on some bonds.

Savings bonds are sold at a discount.”  This does not mean a special low price, but rather that the bond sells at a substantially lower price than the repayment amount to account for all the interest it will accrue over its term to maturity.  Unlike savings accounts at banks or credit unions, which pay interest out at regular intervals over time, the earnings on savings bonds come in one lump sum when the bond matures.  For example, you may buy a $50 bond for only $25.  The $50 the Treasury gives you at maturity repays you your original $25 plus all the interest earned on it during the time that the Treasury held the money. The Treasury sells bonds of various maturities in denominations of $50, $100, $200, $500, and $1,000.

At one time, you could buy paper savings bonds at banks for no fee.  You got a piece of heavy, elaborately printed paper indicating the amount due to you at maturity.  The bank also registered you as a holder with the U.S. Treasury.  But now, for the sake of economy and security, the Treasury sells EE savings bonds directly to the purchaser though its “TreasuryDirect” program: the entire transaction is electronic.  Holders of paper bonds can transfer them to their digital counterpart free through the Treasury’s “SmartExchange” program.  You can learn more about these programs, including the prevailing rate the government pays on savings bonds, on the Treasury’s website, www.treasury.gov. There you can also learn about the Treasury’s inflation-indexed savings bonds, called I-bonds.  Unlike EE-bonds, these come with a guarantee they will keep up with inflation.

Here are some of the tradeoffs between savings bonds and the other savings options we have already discussed:

  • The rate of interest is similar to that of a savings account, either at a commercial bank, savings banks, or credit union. If anything, EE-savings bonds offer a marginally lower rate because they are so safe.
  • The fixed interest rate to maturity can cut two ways. On the positive side, you know exactly what you are getting.  Should market rates fall, you will continue to earn at the original stated rate.  With other accounts, the rate goes up and down — “floats” in financial jargon — depending on variations in Federal Reserve policy and financial markets.  On the negative side, the savings bond will only pay you the stated interest rate even if interest rates rise, whereas the rates paid by a savings account will eventually float up to where market interest rates are.
  • Liquidity is limited. You can get back your money on EE-bonds or I-bonds before maturity, including accrued interest, but doing so is a lot less convenient than having an account at a savings bank, credit union, or commercial bank, especially one that has a network of ATMs.
  • Government savings bonds have tax advantages that savings accounts don’t.  The interest earnings on them are free of state and local income taxes.  You must pay federal income tax on the income from the bonds, but you can elect to defer the tax bill until the bonds mature.  Government savings bonds also have tax advantages if you use them to pay for a child’s education.  If you put the bonds in the child’s name, set to mature when the money will be needed for college, the interest on the bonds is taxed at the student’s presumably lower income tax rate.  (More on these and other tax-advantaged investments in a later post.)

A Note on Online Banking

 Recent years have seen the appearance of online banks.  They offer banking services, including saving accounts, solely through the Internet — they have no physical presence.  Theoretically, their lower overhead costs should allow them to pay higher interest rates than brick-and-mortar establishments, but recent (admittedly unscientific) surveys reveal little difference in those rates. Although some people might feel uneasy about entrusting their savings to an entity with no physical presence, the record thus far shows no greater problem with online arrangements than with others.  Keep in mind that most banking, even in the oldest of institutions, is now more electronic than physical.  The list of firms offering on-line arrangements is growing, including some that are large and well established.  Make sure that any online bank you are considering has the same insurance – especially Federal Deposit Insurance — and safety checks that traditional firms do.

 

Bonds: What Are They and How Do They Work?

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The Basics

 This post provides essential background on bonds.  A bond is simply a loan from the buyer of the bond to its issuer. When an established company or a government needs to borrow, it doesn’t go to a commercial bank, as an individual or small business would, it hires an investment bank to issue bonds on its behalf. Each piece of this “paper,” as the financial community calls it, binds the business or government to repay the face value of the bond plus interest at a designated date.  At one time, investment banks actually issued paper certificates with dollar amounts printed on their face, which is where the expression “face amount” comes from.  Now, of course, almost everything is electronic.

Because bonds are promises, they are sometimes called “promissory notes.”  Because they are the issuer’s debt, they are also often called “debentures.”  But whatever the name, they bind the issuer to make the designated payments to the holder on time, hence the use of the word “bond,”as in “their word is their bond.”

In addition to issuing this debt, the financial community makes an active market by buying outstanding paper from existing owners and re-selling it to others. Because this “secondary market”gives those who first bought the bonds a way to get their money out before the bonds’ due date, maturity date, as it is frequently called, its existence encourages people to buy bond issues in the first place.

Prices in this secondary market fluctuate, depending on changes in demand and supply for bonds generally and also for specific bonds.  When investors have a growing appetite for bonds, the secondary markets fills with buyers.  Their demand pushes up prices, and, according to the nature of bonds, pushes yields down.   (Prices and yields always go in opposite directions.  At the end of this post, a box on “bond math” explains how this works.)  When a flood of new bond issues overwhelms buyers’ appetites or when many existing holders want to sell in the secondary market, the supply of bonds for sale exceeds the demand and prices tend to fall.  Yields accordingly rise.  (Again, see the box on “bond math.”)

Making Money in Bonds

 There are three ways to make money in bonds:

  1. The primary way is through the regular payment of interest over the life of the bond.  Most bonds pay semi-annually, some quarterly.  Other bonds pay their accumulated interest in one lump at maturity.  (These are called “zeros,” because they pay nothing during the period from issuance to maturity.)
  2. Money is made and lost in bonds when they appreciate or depreciate at maturity, depending on whether the buyer in the secondary market purchased at a discount or premium to their face amont. (See box on “bond math.”)
  3. Because prices fluctuate over the life of the bond, you might also gain with a timely sale if you see the prevailing market price for the bond has risen above your purchase price.

The Roots of Price Fluctuations

Supply and demand fluctuate in the secondary market for a number of reasons, but four dominate:

Federal Reserve Policy

The Federal Reserve (Fed in financial jargon) is the government’s bank and the bankers’ bank, often referred to as the “central bank.”  Almost every nation has one to control flows of new money in their economies, mostly in order to smooth economic fluctuations.  When policy-makers want to raise economic activity, they increase the amount of money in circulation, and when they want to cool the economy, they decrease it.  These decisions affect bond prices.

When a central bank increases money flows it enlarges funds available for lending, heightening the demand for bonds, and thus lowering yields.  By reducing the cost of borrowing, the Fed encourages people and businesses to borrow and spend more, which speeds up the pace at which the economy’s wheels spin.  But when the Fed, needing to slow the economy, decreases the flow of money, the demand for bonds falls, their prices fall as well, and their yields rise.  Interest rates are so critical that the Fed announces its policy decisions in terms of short-term interest rates, specifically the rate that banks charge each other for overnight loans, the “federal funds rate.”  But while the Fed talks about a very short-term interest rate, its intent is to move the economy by affecting all rates and yields and thus bond prices.

Inflation

 Because bonds make all payments in fixed dollar amounts – both the repayment at maturity and the contracted rate of interest, called the coupon rate — they are especially vulnerable to the effects of inflation.  High rates of inflation quickly erode the real purchasing power of all these fixed dollar payments. In the early 1980s, when the United States suffered inflation rates higher than 10 percent, the real buying power of the fixed-dollar payments on bonds fell by half in less than seven years.  Needless to say, then, that investors shy away from bonds when they expect inflation to rise.  The resulting decline in demand depresses their prices and raises yields and continues to do so until investors believe that the yields bonds pay have risen high enough to compensate for the inflation-driven loss of purchasing power.  Of course, when investors expect less inflation, their interest in bonds intensifies, they buy, and all this happens in reverse.

Liquidity

Liquidity refers to how much money is readily available for the purchase and sale of securities – stocks and bonds.  In general, it affects prices in much the same way as does the Fed’s adjustments in the money supply.  Individual bonds have different liquidity considerations.

Bonds are said to be liquid when there is an abundance of potential buyers and sellers in the marketplace.  In this environment, traders can easily find buyers and sellers: in other words, they flow readily.  The most liquid issues in the world are US Treasury bonds.  Trillions of dollars of these bonds exist in the market and they are owned by millions of people and institutions.  There is a steady stream of new issues, while billions of dollars of bonds mature, that is come due for repayment every month.  Because the ease of trading makes investors feel more comfortable with US Treasuries, and similarly liquid bonds, they can pay a slightly lower yield than other, less liquid bonds.  Bonds that have unusual features or less active issuers or lower amounts circulating in markets are harder for traders to move and so tend to pay higher yields.  (This higher yield on illiquid bonds may appeal to investors who expect to hold them to maturity.)

Matters of Quality

 Supply, demand, and hence prices also vary according to what is called the “credit quality” of a bond.  Though the issuer is legally bound to fulfill its obligation, it cannot do so if it ceases to exist.  Companies sometimes go bankrupt, governments can be overthrown or go through something close to bankruptcy.  The greater the likelihood of such a mishap, the lower the bond’s price and accordingly the higher its yield, presumably to compensate investors for the potential of loss.  Some bonds, US Treasuries for instance, are all but certain to meet their obligations. They are considered to have the highest credit quality, and command relatively higher prices and offer lower yields than even the strongest corporation.

Three credit-rating agencies specialize in tracking the quality of bonds: Standard and Poor’s, www.standardandpoors.com; Moody’s,www.moodys.com; and Fitch, www.fitchratings.com.  They work for a fee, which issuers pay, hoping to get good ratings and so better prices for their bonds (and, accordingly, lower yields.)  Bond issuers also buy the ratings because a non-rated bond, as they are called, is suspect and thus harder to sell.

The ratings go from AAA, or some variation on this notation, for the most credit worthy issues down to CCC for the least.  The ratings are determined by the current financial health of the issuer, as well as future prospects, based on recent trends and likely potentials. Those rating the bonds also consider what are called bond covenants, which might put their owners first in line (or perhaps lower) for payment in the event of the issuer’s bankruptcy.  Because these agencies gave high ratings to undeserving bonds during the run-up to the severe 2008-09 financial crisis, governments, financial-professionals, investors, and others now rely less on their determinations.

How to Invest

 Whether an individual invests in bonds will depend heavily on what there other assets look like and a number of other considerations particular to them, their nearness to retirement and their comfort with risk just to name a couple of them. There are a great number of vehicles available for those who what to invest in bonds.  Buying them outright is sometimes difficult for the average investor because they are sold in large blocks.  But many mutual funds make bond investing straightforward and convenient for even small investors.  Future posts will go into these considerations in detail.

 

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Bond Math Made Simple

 Almost all bonds are issued with the interest indicated as a dollar payment at semi-annual intervals.  This amount is called the coupon, named after the tickets once attached to the old paper certificates that owners would clip off in order to claim their interest payment.  Say you bought $1,000 worth of a bond that paid $50 a year.  It would be referred to as a 5 percent bond because the indicated annual dollar payment would amount to 5 percent of the $1,000 purchase price.  This last figure is also often referred to as its “face amount” or “par”because that number once appeared on the face of the old paper certificates. It would pay you that $50 a year, $25 every six months, until the bond matures, when the issuer would return to you the $1,000 you paid for the bond.

Here is the relationship stated in a simple equation:

(semi-annual payment) × 2 = Annual payment                                                                                                                                        (annual payment in the secondary market ÷ face value) × 100 = annual percent interest.

In this example:

$25 every six months = $50 a year                                                                     ($50 ÷ $1000) × 100 = 5%

As supply and demand for bonds fluctuate in the secondary market, the changing price alters the calculation.  If a surge in demand drives up the price of a bond, an investor might have to pay $1,100 to buy the $1,000 face amount of this bond.  Financial jargon would describe the bond as selling at a 10 percent premium to par, because the $100 difference is 10 percent of the original $1,000 face, or par, amount.  Because the bond still pays $25 twice a year, that $50 a year is a smaller percent of the purchase price: to be exact, 4.5 percent.

(50 ÷ 1,100) × 100 = 4.5%

This rate is called the “current yield” — the fixed dollar amount paid each year as a percent of the purchase price.

Of course, the issuer will only repay $1,000 at maturity and not the $1,100 paid by the buyer in the secondary market.  To get a full picture of the bond’s return, the investor must also consider this $100 loss when the bond matures.  That means the overall percent return is really a little less than the 4.5 percent current yield.  Financial people use a complex formula to build this consideration into the percent return on the bond, what they call the “yield to maturity.”  There is no need here to go into the details of those calculations except to note that the more distant the maturity date, the less imposing the ultimate loss is and so the less significant is its impact on the calculation of yield to maturity.

This all works in reverse, if supply-demand fluctuations in the bond market reduce the price of the bond below par.  In this case, the fixed $50-a-year payment of our example would produce a current yield above the initial 5 percent.  If, for instance, a lack of demand drives down the price of our $1,000 face amount bond to, say, $900, a 10 percent “discount” in financial jargon, the “current yield” would come to 5.6 percent

 ($50 ÷ $900) x 100 = 5.6%

Because you bought the bond at a 10 percent discount, the $1,000 paid at maturity would also net you an extra $100 at that future date.  The “yield to maturity” would then exceed 5.6 percent.  How much would depend on the length of time from the purchase of the bond to its maturity date.

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What Do Hedge Funds Hedge?

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The answer is: very little, at least these days.  The term does have historical origins, but it otherwise it misleads. Whatever the name’s applicability, hedge funds have a perennial popularity, seeming to carry associations with wealth and sophistication.  In reality, they differ so much from one another that they hardly count as an investment style.  What they have in common is less their approach to investing than their legal structure and costs.

Where Did Hedge Funds Come From?

 Hedge funds have been around for a long time.  The first fund appeared in 1949.  Its founder, Alfred Winslow Jones, had great confidence in his ability to distinguish good stocks from bad, but he doubted anyone’s ability to forecast the direction of the overall market.  It frustrated him that he could pick the best stocks in the world and still lose money if markets fell.  His answer: buy stocks that looked good, often with borrowed money — on margin in financial jargon (more on this in a coming post) and “sell short” stocks that looked bad. Selling short involves selling a security that you do not own for delivery sometime in the future. Investors do this in the hope/expectation they can buy at a lower price before they have to deliver.  By balancing the short sales against the buys, Jones’s portfolio did not depend at all on the ups and downs of the whole market.  Instead his portfolio’s performance reflected only his stock selections.  Because the short sales were said to hedge the buys, Jones called it a “hedged fund.”

What Are They Now?

Most of these funds have long since abandoned this rather cautious approach.  Instead, they invest in a great variety of sometimes-risky assets in order to get superior returns, many of which have nothing to do with hedging.  Unlike most mutual funds available to retail investors, hedge funds can and often do invest in less common investment vehicles, including, for instance, commercial real estate, financial derivatives (to be discussed in a coming post), and currencies, among others.  They often concentrate their investments rather than diversify them.  The funds also frequently borrow money to redouble their investment bets. This “financial leverage,” as it is called, can enhance their returns when things go well, but because they owe the money regardless of how things go, it can devastate fund performance when things go wrong.  Beyond this general description, there are too many different approaches to list here.

Here is why hedge funds can take greater risk than most retail mutual funds and other investment strategies:

  1. Nearly all hedge funds require a rather large minimum investment and insist that investors leave money with them for a minimum time, called the lock-up period.  The size of the minimum varies greatly from fund to fund, but no average investor would consider it easy.  The length of the lock-up period can also vary.  Sometimes it extends to year or more.
  2. Even after the lock-up period, most hedge funds only allow withdrawals at set intervals,quarterly, perhaps, or sometimes only semi-annually.

Because of these arrangements, hedge fund managers share little of the concern common among mutual fund managers that sudden spates of withdrawal by panicky investors will force them to sell at inopportune moments. Hedge fund manages can consequently take risks that might enable them to wait out temporary market reverses.

Legal Structure

 The Securities and Exchange Commission (SEC) protects the general public from hedge fund risks by restricting the number of participants allowed into any fund, and also by limiting those participants to what the Commission calls “qualified investors.”  To qualify, you must demonstrate an annual income of at least $200,000 a year for the past two years and have a net worth of more than $1 million, excluding your primary residence.  Regulators believe that investors with these resources can more easily wait for their money and survive the potential loss implicit in the risks hedge funds frequently take.

Legally, hedge funds are set up as limited partnerships and often refer to their investors as “partners,” an arrangement that gives them tax advantages, especially because their profits are taxed at capital gains rates instead of the higher rates applied to ordinary income.  (A coming post will go into detail on taxes.)  Hedge funds also charge far higher management fees than do mutual funds or most other investment arrangements.  Hedge fund fee structures are often referred to as “two and twenty”: the fund charges 2 percent of the invested assets each year and 20 percent of any gains on them. This 2 percent is controversial because it is considerably higher than most retail mutual fund fees, and must be paid even if the portfolio suffers losses.  Because of their fee structures, tax advantages, and wide range of investment approaches, a common jibe in financial circles holds that hedge funds are compensation schemes for managers masquerading as an investment approach.

 

The Mysterious Allure of Bitcoin

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Bitcoin has had a wild ride.  It entered 2018 roaring up more than 280 percent from a little over $4,500 a coin late in 2017 to $17,429 by the first week of the new year.  By week two, it had fallen some 35 percent to $11,403.  From there it fell farther, some 48 percent, to $5,903 by late June, not much above where it was toward the end of 2017.  It then climbed some 42 percent to $8,424 by late July and then fell some 27 percent to $6,184 by the middle of August. It has bounced around near that price since.

The initial 2018 gain sparked much interest.  The word, Bitcoin, seemed to be on everybody’s lips.  CNBC reported on it almost hourly.  It was the first question from anyone who knew I was in the investment business – friends, relatives, the man behind the counter at the Madison Restaurant on Manhattan’s East Side, where I go for breakfast, the fellow at TSA who asked my profession.  I gave everyone the same warning, not about this particular investment but rather about anything that soars as fast as Bitcoin.  I also asked if they knew what Bitcoin was besides something that had gained value very fast.  When it became apparent that no one had the slightest idea, I could offer another warning: never invest in something you do not understand.

What is Bitcoin

Some say this is a new kind of money.  Some journalists call it a crypto-currency, apparently because it is created through an encrypted algorithm.  The U.S. Treasury classifies it as a commodity, though unlike tin or gold or wheat, it is created entirely through its algorithm.  I suppose we could call it a synthetic commodity.  It certainly behaves more like a commodity than money: During periods of enthusiasm, its price skyrockets only to fall precipitously in response to investor doubt.

Bitcoin and other similar but less famous creations are products of a remarkable mathematical innovation.  Referred to as blockchain, it can control the supply of something made entirely by people.  Its algorithms also allow participants to verify trades as well as Bitcoin ownership even as they ensure anonymity.  This is why the system is also often described a distributed ledger.  (The mathematics behind this system are complex, and even if I could master them, this is not the place to go into their intricacies.)

Suffice it to say that because of these characteristics Bitcoin and its blockchain competitors are described and often offered as substitute money.  The prospect of them as money has appeal to many.  Until the advent of blockchain, the only way to control the supply of money and verify ownership came through the centralized record keeping of the banking system, which in the United States includes the Federal Reserve, the Treasury (which itself includes the Office of the Comptroller of the Currency.)  These institutions might not know just who has cash in hand or what he or she is doing with it, but they do know to the penny how much exists and they control that amount of currency in circulation.  At the same time, the banking system knows who owns which account and how much is in it.  Blockchain, with its unique distributed ledger, offers an anonymous alternative. 

Its Use and Its Future

 Because Bitcoin and other crypto-currencies offer this anonymity, they are especially attractive to those who would rather not have their dealings recorded in any government-related system.  Blockchain currencies are untraceable, like $100 bills or gold bars, but they’re even more attractive because they have none of the clumsiness (or possible drama) of a suitcase full of bills.  They can move in the millions even billions through the Internet — an impossibility with paper money and gold bars, at least not with anonymity. It speaks to these qualities that Russian and Venezuelan officials have expressed hopes that such virtual currencies will enable their countries to end run American sanctions.

Many people forecast that Bitcoin and its kin will soon replace today’s national currencies – dollars, pesos, pounds, euros, and so on.  Bitcoin(s) could become money as long as everybody is willing to accept payment in them and believes them to be “safe.”  At the very least, that day will have to wait until Bitcoin leaves behind the wild price swings that have marked it so far.  To become a dominant currency Bitcoin must also jump significant political hurdles. Governments have no desire to lose control over their ability to create and verify the ownership of money.  Several countries, fearful of just such substitutions for their currencies, have already banned the use of Bitcoin and other crypto-currencies.  The United States, Japan, and the European Union have not gone this far — yet.  But should a day of reckoning arise, it’s a good bet that governments will impose control, and Bitcoin, whatever its future as a synthetic commodity, will fail as a substitute for money.  For the investor, then, Bitcoin becomes another potential addition to his or her portfolio, but one with more risk than many, and less predictability.

 

 

What About Investment Clubs?

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Several readers have had questions about investment clubs.  They are coming from both beginning investors, who hope they will learn by joining one, and more experienced investors, hoping that a club will allow them to show their stuff.  The answer to both questions is, “Yes” — beginning investors can learn a lot in a club and the more sophisticated can increase the breadth of their investment action.  But not all clubs are created equal.  Some function better than others, both for learning and for investment success.  Here’s a guide for choosing a club or even starting one.

Investment clubs are surely the most enjoyable way to invest your money, and they can offer an investment education as well.  Most are private groups of 15 or at most 20 members, who pool their resources to invest, usually buying stocks but sometimes also bonds and more exotic investment instruments.  (Subsequent posts will focus on different investment vehicles, explaining what they are and how to buy and sell them.  A recent post on stock basics began that process.)

Organization 

Clubs typically organize themselves around a community, a church, a synagogue, an adult education center, or even just a neighborhood group.  They require monthly payments (which can range upwards from $20) into a common fund.  They meet regularly, usually twice a month, to discuss investing and consider sell and buy decisions.

Most clubs appoint or elect officers to establish an administrative structure along these lines:

  • A president who sets meeting dates, plans activities, and runs discussions.
  • A vice president to fill in for an absent president.
  • A treasurer who controls the club’s brokerage and banking accounts and places all buy and sell orders
  • A secretary to remind members of meetings and keep complete minutes. This last function is critical.  Investment discussions can become complicated.  Because not all investments work out as well as others, it is essential to know which members said what and when — not to assign blame, which would surely destroy the club, but to learn from past mistakes.
  • A “director of research” or “education officer” who distributes research material among members, perhaps invites guest speakers, and arranges field trips to broker presentations, for instance, or even the headquarters of a firm in which the club has a stake or is considering one.

If there are no clubs in your area, you can establish one.  Make sure the members are compatible.  Investment discussions inevitably involve disputes, and it is crucial that members know how to handle these in a productive manner.  It is also important that at least some members have investment experience beyond sometimes reading The Wall Street Journal or The Financial Times.  Actual experience in an investment firm or a broker would be ideal.

Best Practice

During the 2008-09 financial crisis, many clubs lost a lot of money and disbanded, experiences that left behind much disillusionment. But there is nothing inherent to clubs that makes them more vulnerable than any other investment arrangement.  (Many professional investors also lost a lot of money during the crisis.)  The best approach is not to dismiss the idea of clubs but rather to ensure that the ones you join maintain clear guidelines on how they invest and how they control risk.  These guidelines can limit losses even in the worst of times and even blunt, if not completely eliminate, conflict among club members.  Guidelines might include:

  • Procedures to receive new members and for members to withdraw their funds.
  • To determine when the club will reinvest dividends and interest payments and when it will distribute them among the members.
  • Which newsletters and research materials the club will use and at what interval it will reconsider these subscriptions.
  • The establishment of risk guidelines up front that:
    • Insure adequate diversification among different sorts of assets (of which more in subsequent posts) the club should determine the maximum proportion of the club’s assets that it can hold in a single stock or bond.  As a rule of thumb, the upper limit should seldom exceed 5 percent.
    • Determine exactly what sorts of investment vehicles it will and will not use — stocks, bonds, foreign securities, real estate, and the like.  (More on each of these in coming posts.)
    • With an eye to controlling losses, how much volatility or loss it would tolerate in any holding before reconsidering it.  (Some clubs set an automatic sell, called a “stop-loss order,” when a holding reaches this point.)

Guidance on best investment practice for clubs is available from umbrella organizations.  The largest is Better Investing, www.betterinvesting.org. It claims five million investors.  For a small fee per club member, your club can join Better Investing.  It will offer training and educational material, considerable investment research, discounts on subscriptions, and the ability to buy general liability insurance, which could become desirable as the assets involved grow.  The Securities and Exchange Commission (SEC) also has information on investment clubs at www.sec.gov/reportspubs/investor-publications/investorpubsinvclubhtm.html.

You might also seek more general and in-depth investment insight at ProsperAmerica.  You will find its website at www.prosperamerica.org

Stock Basics

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Stocks remain a popular investment vehicle and with good reason – they amount to a wager on the economy’s future.  Equities, as stocks are often called, rise and fall according to all the particulars that affect corporate profits — but basically they rise when the economy has promise and fall during recessions or when investors otherwise doubt the economy’s prospects.  Because stock prices can at times move violently, investors, unless they are lucky timing their purchases and sales, will realize their best payoff over the longer term.  The longer you can wait for the returns, the more stocks you will have in your investment portfolio.  (More on this in a later post.)  

What Are Stocks?

Stocks are a partial ownership in all that the issuing firm owns and earns.  Companies issue stock to raise money, usually for expansion.  This money is called equity capital.  

There is no limit to how many shares a company can issue. Managements that prefer to limit ownership in just a few hands issue relatively few shares.  Companies with expansion plans that require a lot of financial capital often issue thousands of shares.  There are benefits and disadvantages to either approach.  Using equity (stocks) instead of borrowed capital (money) can make the company more financially stable.  In hard times, the firm has to pay lenders even if it makes no money, but shareholders can claim only a share of the profits.  The disadvantage of issuing more shares is that they dilute the value of existing shareholders.

The most common sort of stock is called, not surprisingly, common stock.  These entitle their owners to any distribution of company profits, called dividends.  Owners are also entitled to elect board members and vote on other basic matters of ownership.  Each share gets one vote, not each shareholder.  The largest shareholders generally have control of the company’s decisions.  Companies sometimes issue preferred shares.  These tend to command more generous dividends than common shares and usually stand before common shares should the company suffer bankruptcy, but they typically lack voting rights.

Making Money in Stocks

Stocks offer two ways to make money:

  1. Dividends are periodic cash payments (almost always quarterly) that management pays shareholders out of the firm’s profits, what financial people usually refer to as earnings.  Dividends are entirely at the discretion of the corporation’s board of directors.  Usually, the board makes its decision based on how much the company has earned and what other uses it has for the money — say investing in new facilities.  Companies that are growing fast and need to invest to keep up with their expanding business pay low or no dividends.  Slower growing firms with less need for the money pay higher dividends.
  2. A more important way of making money in stocks is price appreciation.  This is determined solely in the market where investors trade available shares of stock. Neither management nor the board of directors has any direct control over this activity.  If the company is doing well, earnings are growing, and there is a promise of further growth, people will want to own a piece of that action and their buying bids up the price of the stock.  This works in reverse if the firm faces trouble.  Appreciation can also reflect dividends.  Higher dividends will often attract buyers whose demand prompts price appreciation.

The Roots of Price Fluctuations

Stock prices fluctuate as investors alter their expectations of future profits.  Financial theory holds that the fair price of a stock is only a reflection of the flow of future dividends and the earnings that might support future dividends.  That future flow is discounted, because dollars you have today can be invested and earn money, whereas future dollars are inevitably uncertain and cannot earn until they are paid.  A well-regarded algorithm, called the “dividend discount equation” calculates a fair price for a stock by so discounting prospective earnings and dividends.  Anything that improves a company’s profits next to the expectations previously built into its price will to raise that stock’s price.  Anything that makes the future look more problematic tends to drive its price down.

A number of factors can influence these calculations, some general, some specific to the industries in which the company operates, some specific to the company.  A complete list would fill several volumes, but here are seven main issues that move stock prices:

(1) The Economy

Because profits generally follow overall economic activity, an improved economic picture promotes a general rise in stock prices, called a rally or a bull market.  Economic clouds prompt stock price declines, called a correction or a bear market. Because no one can know the future, stock investors continually assess economic trends and revise their opinions accordingly. The flow of news is continual.  The list of indicators, statistical or otherwise, is too long for this space and absorbs the attention of thousands who work in the industry, making it very hard for an individual to get ahead of the market’s regular reassessments.

The movement of interest rates also has an effect.  Because lower interest rates make borrowing cheaper and so more likely that consumers will spend and business expand, they usually signal an economic pickup that tends to lift stock prices.  An interest rate increase, because it has the opposite economic effect, tends to depress stock prices.  Interest rates also feed directly into stock valuations. Because higher interest rates offer better ways for your dollars to earn, they prompt investors to discount future dollars more severely, depressing stock prices.  An interest rate decline has an opposite effect.

(2) The Industry

Even more than changing perceptions of the general economy, industry-specific considerations move stock prices.  Are oil prices rising?  That’s good for those who produce oil and who service the oilrigs.  It’s bad for those who use oil — airlines and truckers, for instance.  A technological breakthrough may benefit some at the expense of others.  A bumper wheat crop abroad will hurt American wheat farmers by depressing the prices their harvest can command, but it could help food processing firms who buy grain. These few examples only hint at the constant flow of industry information that just as constantly changes market opinion and moves stock prices.

(3) Legislation and Regulation

Here, too, the flow of news is endless.  If Washington, for instance, were to support a major infrastructure-rebuilding program, prospects for construction firms would improve and their stock prices would rise accordingly.  A decision to step up defense spending would definitely boost prospects among defense contractors and so the prices of their stocks.  The Affordable Care Act (ACA) improved prospects for health care insurers (at least initially) by driving millions of new customers their way.  But such news can cut the opposite way.  The adverse effect of such spending on Washington’s finances might negatively impact stock prices by threatening to push up interest rates or taxes or both.

Regulation, at the national, state, or city level, can have its own effects.  Environmental rules will enhance the prospects of some firms at the expense of others, say solar over coal.  Stricter financial regulations after the crash of 2008-09 had a powerful effect on financial firms, especially smaller ones.  Safety regulations raise costs for some firms and industries but create opportunities to those that sell products to help other firms comply with those regulations.  Here, too, the flow of information constantly changes investor assessments of the future and thus stock prices.

(4) News About Staff

If a company hires someone with widely recognized ability, investors may expect an improvement in the company’s fortunes and buy its stock, pushing up its price.  The loss of a key executive can raise questions about the future and so depress the company’s stock price.  A large number of departures, even of not-so-famous, middle-level employees, can raise questions about the firm’s ability to manage and so push down its stock price.

Scandals also move prices.  A staff member who runs afoul of the law can depress the company’s stock price by increasing investor worries over fines or other legal actions. This sort of news tends to break suddenly, creating violent swings in stock prices.  Bad news for one firm, of course, might also lift the prospects of its competitors and so of their stock prices.

(5) The Firm’s Product Line

Any change in product line, positive or negative, will move the company’s stock in a sympathetic direction.  Drug companies are particularly vulnerable.  Bringing new drugs to market is a very lengthy process, and failure could cost these firms dearly.  Lawsuits involving pharmaceutical companies are more expensive than in other industries. But a successful new drug, sometimes referred to as a “blockbuster drug,” can lift profit prospects dramatically and the company’s stock price with it. Drugs are just one example.

(6) Natural and Political Events

Stock prices also respond to geopolitics and natural events. Revolution, war, elections, and natural disasters anywhere can disrupt business and affect stock prices.  Tariffs, much in the news today, can help the firms protected by them and hurt those who have to face them.  An earthquake could wipe out an industrial operation.  Even if insured, the firm’s stock price would suffer because the company would have lost its ability to engage in otherwise lucrative businesses.  If the disaster is large enough, that company’s insurers might find themselves facing huge payouts that could bring down their stock prices.  For investors, reassessment is always continual as is the movement of stock prices.

(7) Buybacks, Mergers, and Acquisitions

Management may from time to time decide to use retained earnings to buy back their own stock on the market.  Typically, it is done in lieu of raising dividends.  Such additional demand for the stock will tend to raise its price.  But when the buyback program ends, the sudden drop in demand for the stock can depress its price.

Mergers and acquisitions (M&A) happen for all sorts of reasons.  They usually generate a lot of drama and so a great deal of media attention. Sometimes the buyer sees what the financial community calls “synergies,” meaning that the business of the acquired firm has many similarities to that of the acquirer and hence opportunities for efficiencies or market dominance.  Sometimes the merger occurs between two quite different parties that see a way to diversify their respective product lines.  Some acquisitions are hostile— meaning that the firm being bought resists the transaction.   Others are amicable— meaning that both parties like the idea of merging.  The effect on stock prices varies depending on the structure of the deal, which can become very complicated.  Generally, the buyer’s stock suffers and the stock they are buying rises, at least initially.  This often happens in a hostile acquisition, as the buyers will try to blunt opposition by raising the price they offer for the other’s stock.

Getting into the Action

Taking all this into account, you might well ask why any individual investor would risk stock ownership.  Such a hesitation is understandable.  But an investor who will not need the money for a long time and has basic confidence in the firm’s management and its products can feel secure that its stock will rise over the long term.  There are also ways to enlist professional help in making all these continual assessments. More on these options in subsequent posts

First Steps for a New Investor

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For many, investing seems to happen in a foreign place where the inhabitants speak a strange language.  Most don’t know where to begin, and it’s easy to understand why:  They don’t teach this stuff in school.  One thing, however, is clear.  Unless you entered life with a trust fund, investing starts with small savings and the cultivation of the savings habit.  So let’s start at the beginning, with techniques for saving and how to plan your investment scheme.

Developing the Saving Habit

Too many of us procrastinate.  It’s easy to convince yourself that setting aside only a few dollars will make little difference compared to some “urgent” household or personal need. While sometimes these needs can be genuinely important, most are usually an excuse to put off saving and seek immediate gratification instead.  It might help you resist temptation to realize that every dollar you save each week or even each month will start growing beyond what you are depositing, what I call building on itself.  And soon the increased savings will offer their own gratifications.  The effort will also help you strengthen your saving habit, which, in most cases, is more than half the battle.

Here are seven tips to get in the habit of saving:

  1. Put aside all your loose change in a jar at the end of the day.  Better yet, add a dollar or five dollars into the jar each evening.  Such small amounts can quickly become a significant contribution to your savings. And most of the time it’s money that you won’t miss.
  2. Leave your credit cards at home.  Paying with cash will put a cap on how much you spend at a given time.  And if you have to run home to get the card, it might give you time to rethink an unnecessary expenditure.
  3. Contribute to stock purchase plans and reinvest the dividends.  Many companies allow employees to use part of their paychecks to buy the firm’s stock through automatic deductions.  This is money you might otherwise spend.  If you are in such a program, reinvest the dividends instead of taking them in cash.  This is a good rule to follow with any stock you own.
  4. Consider savings as you would any regular expense — like bills from the electric company or mortgage payments.  Set a dollar amount, say 1 percent of your take-home pay, or better yet 5 percent if you can, and “pay” that into your savings account each paycheck.
  5. Use automatic savings plans.  Some employers offer plans that take a designated amount of your paycheck to buy you U.S. government savings bonds (more on these in later posts).  Ask your bank if it can automatically transfer a designated amount each month from your checking to your savings account.
  6. Keep putting money aside even after you have paid off a loan or a mortgage.  Continue to write a check every month for the same amount, or at least a good portion of it, and put it into your savings.  This is money that you have long learned to live without, so you can increase your wealth painlessly.
  7. Occasionally give yourself a reward.  Saving is hard, and its payoff is often years in the future.  So once or twice a year, designate one month’s set aside for a little extra spending. Take the family out to dinner or buy something special for yourself or someone you love. It will give you something to look forward to that is nearer in time than the ultimate use of your savings.

Make a Plan 

Though saving and investment plans vary as much as individual desires and goals, one element should appear in every plan: an emergency fund, a pool of cash for unforeseen events, like sudden medical problems, appliance repairs, or possible unemployment. Ideally, set aside 3 to 6 months income to cover such needs. The money should go into what financial people call a “liquid vehicle,” one that you can access immediately such as a bank savings account or other easily accessible vehicles that I will describe in subsequent posts.  Once in place, this saved money will work for you: by building on itself through bank interest and by protecting you and your loved ones from harm.  Importantly, it will also give you confidence to take the next steps.

Once you have established this basic source of security, and the habit of saving, you can begin focusing on personal wants and needs. There is no right answer here. Much depends on your age, income, family circumstances, and interests. The money should serve your desires as well as your needs.  Some goals are very long term, like a young person saving for retirement.  Others are not quite that far off, like college for a newborn or buying a home, or starting a new business.  Still others may be more immediate, like buying a new car or kitchen.  All are legitimate, but each requires a different investment strategy.

To organize your thinking, create a small chart like the one at the end of this section.  It can link each need to an investment goal.  List your savings goals on the left.  I offer a few examples.  Yours will be different.  Next, fill in the likely cost.  You can research this on the Internet but in the case of housing for example, you may also want to do a bit more research about what it will cost when you are ready to buy.  Next, determine when you expect to need the money.  Count the months to that date and divide the cost by the number of months to see how much you’ll have to put aside each month.

The “months to go” will reflect where you are in your financial life.  A parent starting a college fund for a newborn, will be looking at an 18-year time horizon (216 months) before he or she needs the money.  Other goals will reflect more personal preferences.  If you think your car will last only another year, you’ll have to save for the replacement in only twelve months.  Plans to marry in two years will give you 24 months to accumulate the desired funds.  If planning reveals that your goal requires more savings a month than you can support, you might have to adjust your lifestyle, delay the target date, or even abandon this particular goal.  Harsh as these tradeoffs may seem, they are simply facts of life that no one can ignore.

                                                               Planning Guide                   

Goal Cost Date Months to Go Set Aside Each Month
Car Purchase:
Purchase of Home Entertainment System:
Money for a Good Vacation:
Funds to Buy a New Kitchen:
Purchase of a Home:
Money for a Retirement Nest Egg:  

 

 

Executing the Plan — Time is on Your Side

The further in the future your target date is, the less harsh the tradeoffs.  Remember that everything you save earns interest or dividends that over time will build the fund alongside your monthly savings contributions.  Because you are paid this interest not only on your contributions but also on the interest previously accumulated, what financial people call compounding, the longer you can wait before using the money, the more your savings or investment plan will help you accumulate.  These earnings will defray the burden of the monthly set aside.  Two examples:

One:  You need $20,000 for a car and a year to get the money.  Here, returns from investments will contribute only a small part of the total. In this example, it will require a set aside of about $1,629 a month.  Even if the savings account pays 5 percent, it would earn only about $88 over the course of the year. So most of the money would have to come from your monthly savings contributions.

Two:  With longer-term projects, however, earnings from savings and investments can contribute considerably more.  Say you are one of a newly married couple that wants to buy a $250,000 home in 15 years. To meet your goal entirely from setting money aside, you would have to save $1,389 a month.  But after five years of saving at that rate, your accumulated investment account would amount to $83,333.  At 5 percent interest, it would earn $4,723 a year from then on and more each successive year from the accumulated interest as well as your contributions.  That income alone would effectively substitute for over three months of future savings every year.  After ten years, you would have accumulated $166,666.  At a 5 percent interest return, it would earn $10,784 a year, enough to pay over seven months’ required savings.  These would amount to a major contribution toward your goal of home ownership. This is why time is on your side. The table at the end of this post lays out the accumulations of savings and interest year by year.

With even longer time horizons — say retirement savings — the contribution from investment income becomes even more significant. Over 30 years, in fact, the accumulated earnings from the investments would actually exceed the total of monthly set-asides.  In the example of the home purchase, the annual earnings from accumulated savings already by the fifteenth year would have come close to surpassing the annual savings need originally calculated.

 

                                    Interest Earnings Help Savings Accumulate

Years Yearly Savings Set Aside[1] Earnings on Savings[2] Total Available[3]
1 $16,667 $16,667
2 $16,667 $833 $34,167
3 $16,667 $1,708 $52,542
4 $16,667 $2,627 $71,835
5 $16,667 $3,592 $92,094
6 $16,667 $4,605 $113,365
7 $16,667 $5,668 $135,700
8 $16,667 $6,785 $159,152
9 $16,667 $7,958 $183,776
10 $16,667 $9,189 $209,632
11 $16,667 $10,482 $236,780
12 $16,667 $11,840 $265,285
13 $16,667 $13,264 $295,216
14 $16,667 $14,762 $326,644
15 $16,667 $16,332 $359,643

 

[1]$1,389 a month for 12 months = $16,667.

[2]Five percent on the account amount of the previous year.

[3]Savings set aside plus the earnings on the accumulated savings.

 

How Private Is Private Equity?

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I have received a lot of questions on private equity: what is it, and can an ordinary investor get involved?  The answer to the second question is Yes, and I will return to it at the end of this post.  As for the first question: Both private equity (PE) and its cousin venture capital (VC) are at base a lot more straightforward than they appear in the financial media.

How Do They Work? 

Both PE and VC take a large enough stake in a company to run it and, presumably, use their expertise to make that company more profitable, all with an eye to selling it in the future at a substantial profit.

Venture capital firms usually focus on smaller startups in less mature industries.  They help the operation prosper by bringing financial, administrative, and operational skills that the firm’s founders may lack.  Once they have the fledgling firm operating properly, VC investors sell their stake at a profit, often when the firm lists itself on one of the world’s stock exchanges as a publicly traded company in what is called an initial public offering (IPO).  Most VC firms work with their own capital and borrowed funds and do not take on outside investors

Private equity firms do essentially the same thing but on a bigger playing field.  They take a large enough stake, often in a publicly traded firm, to bring the firm into private ownership, at which point they no longer have to make the public disclosures demanded by the organized stock exchanges.  This, incidentally, is where the “private” in private equity comes from. It does not necessarily imply that the PE firms themselves are private or secretive or exclusive, though some of them are.  They take their purchases off the public exchanges to make big changes over sometimes long periods while avoiding the questions and complaints that the management of a public company would have to endure.  Once the improvements become evident and it is running smoothly and presumably now far more profitably, the PE company reintroduces it as a publicly traded firm, presumably at a substantial profit.

How Do They Do It?

Because PE firms, unlike VC operations, target established, publicly traded firms, you might wonder what special expertise they can add — after all, these targets have run their businesses more or less successfully for years.  PE firms can improve profitability in four major ways:

  1. PE investors have experience with other firms that can bring new and useful practices to the management of the target.
  2. By aligning the interests of management with that of ownership, they can overcome institutional resistance to these supposedly more efficient and profitable practices.
  3. By taking companies private, they can focus on needed, longer-term projects by removing the scrutiny imposed on publicly traded companies, in particular the publication of their quarterly earnings.
  4. They can pare down bloated management compensation schemes.

Participation and Financing

Most PE firms only allow investors considered qualified by the Securities Exchange Commission (SEC).  These are people with sufficient background or investment experience to, in the SEC’s estimation, make informed judgments on whether the firms involved and deals arranged are suitable for them.   Even given these strictures and the big bucks involved, smaller investors can participate in private equity operations because several actually list as public companies.  You can buy stock in them.  Two of the most prominent are The Blackstone Group and Kohlberg Kravis Roberts.

 

What Is ‘Bite-Size’ Investing?

My approach here contradicts to the get-rich-quick schemes promised preposterously by so many websites and the jargon-laden technical discussions designed intentionally to confuse.  Instead, I offer the individual investor a step-by-step approach to investment success, served up in understandable, easily digestible, bite-sized pieces.

I begin small, as do most individual investors, offering a system for saving and choosing a bank or alternative institution.  From this straightforward base, we continue to investment clubs and other ways to get better returns on your savings.

Once you have accumulated enough capital, you can proceed to stocks and bonds.  I explain their fundamental nature and properties, how markets value them and why prices fluctuate from day to day and year to year. From that base, I explain a reliable and low-maintenance approach to investing in stocks and bonds.  From here, I move on to explain in straightforward and simple language more exotic investment devices, including options, futures, foreign investment, currencies, private equity, hedge funds, venture capital and more.

Along the way, I offer warnings, generally against too much emotion and the temptation to be too much clever.  I also describe popular scams, some of which Hollywood has dramatized such as the pump-and-dump scheme of The Wolf of Wall Street, and others that have made headlines, such as Bernie Madoff’s Ponzi scheme.

The blog posts will not necessarily “go in order” because not every investor starts from the same place. But each will instruct.  Some posts will describe how to choose a bank. Others will answer the question what does a hedge fund hedge or how private is private equity.  One will explain how to start an investment club. A more systematic approach is better suited to a book than a blog.