This morning I committed a moderately substantial sum of my savings to a purchase of Apple stock (AAPL).  As discussed in previous columns, I am focusing much more heavily on stock investing and saving in 2013.  Though I still have used a few of my travel and credit card tricks, I believe I am on a path to real wealth, not just nickel and dimeing my way to moderately better experiences.  Although Apple is obviously a quite famous company and it may seem like dumb money to make it one of my first investment, I think I have sound reasoning.

First of all, my guiding principle in all of my investments will be a “buy and hold forever” strategy.  I am looking for a company at a good price that will continue to grow and compound over time.  Thus, I am not overly concerned with near term problems, but looking to identify strong and safe businesses with a “wide moat” who are currently undervalued.

Most companies are reasonably valued when their price to earnings ratios is somewhere around 15.  Stocks in this range tend to have higher returns over time than others who are trading at a higher P/E premium.  Of course investing is filled with all kinds of caveats, and some businesses with very low P/E ratios may suggest an industry that is dying.  Those with a very high ratio may potentially be lucrative, and it is a vote of confidence of sorts that the market thinks there is promise in this company and its business.

Apple’s P/E is currently at 8.86, suggesting an extremely undervalued company.  It is far lower than peers like Microsoft, Hewlett-Packard, Intel and other tech companies.  This would suggest Apple is in a declining business, but of course electronics have only become more ubiquitous and smart phones, tablets, and laptops are in many ways essential items and must purchases for those moving into the middle and upper middle class.  Apple also has an incredible ecosystem that would seem to keep consumers with their products, due to the ease of them talking to each other and sharing items like video downloads across devices.  It is interesting to me that other companies like Google, Amazon, and most recently Microsoft are rising in value due to meagre attempts to penetrate and enter the kinds of consumer fields that Apple already dominates.

Apple also has important brand loyalty, and a great reputation for quality products and high craftsmanship.  It is one of the world’s most admired companies in terms of design and innovation and consumers tend to come back to its products again and again.

While the market for smartphones, tablets, and ultra thin laptops may not be brand new, Apple is well served to pivot and enter into all kinds of consumer electronic areas.  One can easily see its iconic user interface and experience in all kinds of devices from automobiles, to TVs, to watches, to speaker systems, to appliances.

Apple’s balance sheet is sterling.  It is sitting on a mountain of cash and could write a check to buy several major American corporations without and debt financing whatsoever.  With CEO Tim Cook’s hesitancy to return large dividends to investors despite activist shareholder pressure, I have to believe that there is a plan in place to use this cash effectively.

Finally, on the subject of dividends, even if Apple is a mature company like GE or some other industry leader, that means investors are likely to see the stock price rise higher to the 15 P/E barrier and increase dividend payments, thus delivering wealth.

All in all, Apple is a strong company and an industry leader trading at a cheap price.  I think mostly this is irrational, with weird fears of Samsung and over worrying about the future.

The post Apple Stock Purchase Analysis appeared first on Credere Argentum.

A couple of interesting news stories yesterday about the Chinese economy have piqued my attention and made me wonder about the near term future of the country.

First and foremost, this should in no way be interpreted as a completely pessimistic vision of China’s future. China has always been an important ecnomomic and political power in the world and, broadly speaking, the anomoly was from the year 1800-1980 or so when that was not the case. The fact that China is considering a "rising power" is in many ways ridiculous as it is a classic civilization and the world leader for centuries. I fully predict that it will continue to play this role in future centuries.

Still I think it is difficult for any economy to continue at the breakneck pace that China has experienced. If in fact China is a developed country and a modern world power that would be even more odd as large shifts in GDP only occur as consumer and business spending, government spending, investments, and net exports rise. It is very difficult for the broad trends to be much above 8% in mature economies. When the US was inventing whole new industries in the 1990s, the GDP was at best what China’s is now.

Broadly speaking, China is a complex economy with just about every industry in the world. But, according to most accounts, its growth has been primarily driven by foreign direct investment in production and factories which is in turn driven by the need for making good for export in international markets, local investment in infrastructure and large projects, an increasing urbanization rate and consumer spending. Each of these areas seems like it could be coming under threat. Many companies are moving away from the outsourcing bandwagon and moving production back to local markets. There was an important article in the Atlantic about this. arguing outsourcing makes little sense now. Chinese consumers have braodly been reluctant to pick up the slack in recent times, preferring still to save versus spend and support their own market. Businesses from around the world seem increasingly concerned about cyber spying, hacking, and government interference. Just last week, Apple faced intense government pressure over it warranty policy. Chinese leaders are a highly corrupt and top down style, which throughout history has usually not lead to a flowering of long term sustainable economic growth. Finally, it seems as though many local governments are pulling back on their investment in infrastructure and local projects; and that there is a massive exposure to a potential bad credit boom, potentially paling in comparison to the US housing crisis. To top it all off, China has inflation challenges.

This all speaks to the potential for further slowdowns at the very least. It simply seems difficult to imagine that China is self-sustaining and self-innovative enough to truly be an independent economic giant.

The question I then have, is what if the worst happens and a massive bust occurs due to the inability of local governments to repay trillions and trillions of dollars of obligations they have made in building infrastructure. There could be serious damage and who knows if there is enough money around to stablize the financial system.

It is certainly not an imminent risk and a risk that is unknown when it will occur. But the potential to consumers, US jobs, and your investments could be traumatic indeed.

The post China’s Slowdown or China’s Crash? appeared first on Credere Argentum.

I have been on a bit of a hiatus from the site lately, my apologies to the dozens of loyal readers.  I don’t have a particularly good excuse other than that I fell a bit ill and that April is perhaps my busiest month of work at my day job as I prepare my students for this big competition we take part in.

That being said, earlier aversions to some of my once favorite travel bloggers has only solidified.  After taking a bit more of a detached look to their postings, I have come to realize how much the incessant pimping of subpar credit cards and other con games bothers me.  Recently I essentially stepped out of the game in order to live a more financially zen and less stressful life.  I cut down almost all of my yearly fee charging credit cards except for the Chase INK Bold (because it earns 5x points and allows for transfers to United and Southwest), the Citi Aadvantage (because of its benefits and the retention bonus they offered), and the Citi Reserve Hilton (because of the free night certificate).  I saved thousands in doing this and since I am not really that excited with premium air travel, I feel the loss of so called aspirational travel is no real loss.

But yet reading these blogs and being on the lookout for various little money savers and travel games was sort of a hobby / addiction.  A way to make the day go by.  What would I read in those 15 minutes I take my morning coffee or the few minutes when I am killing time and needing to lookup something on my phone?

Well, thankfully, I have found my new favorite travel blog: The Wandering Aramean.

The site seems to share some of my travel tastes by focusing a bit more on historical sites of cultural significance, versus resorts and overly pampered hotel stays in blinged out new suites.  More importantly, the guy is pretty much a genius at explaining how to maximize miles on mileage runs and on how to book cheap fares using free search engines.  I highly suggest checking the site out on a daily basis.

Well, thanks for coming back and please try to forgive my extended absence!

The post A New Favorite Travel Blog appeared first on Credere Argentum.

The Financial Times has an article that predicts China’s GDP will greater than the United States by 2016.  Most definitely this will be the cause of some alarm and over excitement come the 2016 election.  While one should never make predictions, especially about the future, this may cause a lot of introspection in the United States.

But it really shouldn’t.  First of all, it certainly may mean that China can improve their military and spend more on power, but they still have a far larger population to take care of and service.  What size giveth (larger raw number for GDP), size also taketh (need for more infrastructure and services).  It will be difficult to reach the kind of sweet spot of high GDP per person and giant size that the US has been able to hit.

Even more importantly, perhaps, is that this is really nothing new and the anomaly has been the past 150+ years where China has been behind the times.  Lest we forget, many innovations vital to modern life were first developed in Asia and the Middle East, only to be much later adopted by the West.  It is perfectly fine to have a more multi-polar world like we once had in the late 19th century.  We, hopefully, though will have made some strides in that time and not repeat the horrors of World War One and 2oth century European military destruction.  Also, there is always something a bit racist about worrying about the growth and success of someone else.  In fact every American stands to benefit from the innovations a vibrant China can provide, and the market it will surely be for all of our goods.  A strong China has much to offer that we can benefit from.

Just as importantly, of course, even if we are worried China still has a lot of challenges to navigate and the transition from Communist party dictatorship has not gone that well in many places.  The USSR was the world’s second largest economy as recently as 1975.

Finally, lest us remember the Founders.  We should focus on making our society as free, fair, and just as possible.  Let us not be involved in too many foreign entanglements.  Or post WW2 story has not always been that beneficial, even to ourselves.

The post Implications of Chinese Growth appeared first on Credere Argentum.

With something approaching a flood of recent reports all around the web, including one this morning in the Wall Street Journal, it appears that home prices are rising around the US, substantially so in some cases.  As has been said, in the short term prices are set as a popular contest, with people voting on what they are worth; but in the long run the market is a weighing machine, ultimately pricing items somewhere close to their true value.  Property was certainly overvalued in the early 2000s, especially when accounting for easy lending practices that boosted demand of available homes.  Since supply via construction projects always lag behind demand in a sector like housing, when prices popped we were stuck with a sharp and sudden decrease in demand even as new inventory was still coming on to the market.  The result was a catastrophe that nearly brought down the world economy and severely damaged the United States and most households.

Even those who kept their homes were dealing with decreased, values which made it extremely difficult to sell the homes without a massive loss, and made refinancing into more attractive borrowing terms with interest rates at an all-time low impossible for many.  According to the Wall Street Journal, though, some estimates now claim that as many as 1.7 million households have been pulled “above water” in the past 12 months.  This is obviously an astounding number and good news for the economy.  Here is what it may mean for you:

1. Now could be a good time to buy a home if you are thinking about it:

Prices are not likely to fall drastically in the near term, but still don’t count on easy and rapid appreciation either.  If you are thinking of buying a home in the next 3-5 years, have money for a solid down payment, and your credit score is good enough to qualify for the rock bottom interest rates ; I would strongly suggest keeping an eye on the market.  No need to run out and buy something this month just to do it, but it may be worth looking at homes in the next 6 months.  Don’t forget to be conservative and avoid the mess that got people into trouble in the first place.  Keep you monthly payment to no more than 33% of after tax pay, and plan on staying in the home for at least 5 years.

2.  Look to refinance:

One of the great scourges of the housing market collapse was the inability of borrowers to refinance into lower interest rates that could have saved people thousands of dollars a year.  Banks were reluctant to write down the value of the home and lose money on the transaction, despite programs like HARP that were designed to facilitate these kinds of deals. I think one of the great things that could have been pushed more aggressively legally and politically was a “bail out” for regular people via refinancing.  Would have gone a long way in curing the social strife and real economic harm to the real economy.  Refinancing is cumbersome, you are essentially applying for a loan and buying the house all over again, but it can really pay off over time.

3.  Look to get out of your escrow:

I am a huge fan of trying to make your own escrow account for tax purposes, banks almost always take too much of your money and can keep up to $1500 over the amount they really need as a reserve.  I think if people just pay themselves and escrow they can earn a little bit of interest (but don’t DON’T chase yield by trying to invest this money) and free up he reserve cash that banks almost always demand.  Plus it makes you more aware and take more ownership over your tax bill and will make you more likely to do healthy things like appeal the assessment that can save big over time.  Problem is, most banks won’t allow this until you have at least 20% equity in the home.  With so many people underwater, this was obviously difficult, but now things may be different.

4.  Move if you want to:

You may have not moved or taken opportunities because you were worried about losing money on your current home and didn’t want to stick you toe back into the volatile housing market.  With skies clearer now, moving is probably do-able in a more normal way.  However, I still think moving too often is largely nutty, paying the broker’s fees as a seller and dealing with all the moving expenses, might not get you too far away from just improving your own home.  More importantly, it probably makes a lot of sense to be happy with a bit less if it makes some sense to you.  Don’t go chasing a lifestyle you neither need nor really want just because the advertising industry and home improvement industry seems to be telling you can.

5. Buy an investment property:

The rental market seems to be back, and even with a rebound in housing prices, one lingering affect of the crisis is that many folks are perfectly fine with the simplicity of a rental.  There is even a broader movement away from an ownership society to a world of rentals.  This may be true, but does offer exciting possibilities for those with the cash, discipline, and patience to become landlords.  Property management is a predictable and broadly simple business that you can largely do passively while working another job.  Thus it represents opportunity for many and can net you a nice chunk of spending money every month, plus the long term value of appreciation of the property if you are in the game for the long haul.

6. Save and Spend a Little Bit More:

With rising home values you are, literally, more wealthy.  If you were extremely thrifty for the sole purpose of fearing further depreciation in housing, relax.  The worst is probably over (but don’t count on crazy appreciation).  To celebrate, try and save a little bit extra each month for yourself in a retirement account, and maybe celebrate in a small way every other month.  Buy your spouse something small and unexpected, or treat the kids to a activity that you wouldn’t have a year ago.

The post Rising Home Prices: What It Means For You appeared first on Credere Argentum.

As I have made clear on a few occasions, I am slightly pivoting this blog in the direction of looking at investing principles more frequently.  I will still be covering general consumer education information, with a focus on common consumer financial products, but I will now more often be discussing investment strategy.  Currently, I am making my way through some of the classic books on investing.  Recently, I completed Ben Graham’s book on value investing The Intelligent Investor, and now I have moved over to Phillip Fisher’s seminal tome on investment strategy.

While Graham had a somewhat serious list of criteria, many of them technical and statistical, in order to make an investment in a company; Fisher is much more focused on growth and the ability of the company to keep improving and increasing its profits.  He also seems to play down the overly strict emphasis on strict value numbers like P/E ratios and such.  His focus seems much more qualitative as well, trying to find the very best companies that will be around for a long time to come.

I think this is an important point, a company may be having great profit growth, be well-positioned, and the market (since it is isn’t stupid) will place a higher price on such a company relative to its earnings.  This doesn’t necessarily make the company over-priced, if indeed the investor has done his homework and truly believes the company is a great company.

What’s interesting to me when I apply a lot of Graham’s techniques in my own searches is that I find a lot of insurance companies.  This makes sense as they are safe and reliable and rarely trading at too high of a multiplier relative to earnings or book value.  Many also have healthy dividend payments which Graham likes.

Fisher, though has pushed me to consider technology and industrial companies in my searches and has expanded my horizons on trying to find aggressive growth and value in theses areas.

I like both approaches.  I think I will generally invest in index funds and vehicles that track the market with low fees in my 403(b) accounts and my IRAs.  For my true investments outside of retirement, I think I will try and pick one Graham value stock and one Fisher growth stock and run my own little experiment (to be reported on in 50 years time) about which of the two greats is better,

The post Phillip Fisher’s Common Stock and Uncommon Profits appeared first on Credere Argentum.

Yesterday I came across this article in the New York Times, written by Graham Hill, an entrepreneur and someone who has apparently reached the dream of making a lot of money at a young age.  With that money, he lived happily ever after with a couple of giant houses, cool cars, and all the gadgets anyone could ever dream of.

Only, he didn’t.

He quickly realized that his stuff began consuming him, and that it took an inordinate amount of time to run his stuff.  Things like organizing gutter cleaning, insuring all of the stuff, trying to maintain everything, and keep records of it all eventually began to consume him and he suddenly realized that he was “working a dead end job that he never applied for”.  So, with the help of being in love, he has given it all up over the last 15 years and now lives the minimalist lifestyle (apart from what seems to be a rather large and exciting travel budget).

I believe this article (despite its somewhat conflict of interest that the author is financially involved in designing small homes, a conflict the author readily discloses)  should be bookmarked on most people’s computers and regularly referenced.  It has made an impact on me already.  So often, partially because I am a bit of neat freak and have a minor touch of OCD, I run around the house organizing and sorting things.  Then, I go to my computer and find documents to move around.  Then I make sure my iTunes is updated and my playlists are ready for the next day.  In short, I run around like a freak basically managing my stuff.  I do this, I am sad to say, all too often.

What I do less often are the things I really want to do, like taking a walk, reading a book, going for a swim, watching a new movie, or hanging out with good friends.  These things bring me immense satisfaction, they are cheap, and they are the moments in life that I generally remember.  One of the most fun times I had was when I was in New York City taking a class on Lincoln and Emancipation.  I had one sheet and one pillow in an NYU dorm, and only the clothes and possessions I could carry in my carry on luggage for an entire week.  But every day seemed very full of life, as I was learning new things, seeing new things, and not worrying about my stuff.  Then, when I come home, I started thinking about all of the dumb things I needed to do like mowing lawns and gardening and sorting various nick-knacks.

To some extent, I do like all of these things, I find gardening and house work a bit therapeutic for instance, but I also tend to be a perfectionist about my stuff and its cleanliness and state and think they somehow reflect me as a human being (generally I approach this in a negative way, not a self-absorbed way, for example I usually think that if something is messy it means I am being lazy and I get all guilty).

So, the answer, I think, is what Mr. Hill proposes.  Just have less stuff.  Make the stuff you have valuable and important.  Forget the rest.  Live happier and  more rich, in all senses of the word, than you ever have.

The post News You Can Use: Living With Less. A Lot Less appeared first on Credere Argentum.

One of my favorite credit cards has been the Chase Freedom.  It has nice 5X quarterly bonus categories.  It has no annual fee.  It can participate in Chase’s Ultimate Rewards program and even transfer its points to the more lucrative travel partners if you pair it with at least one premium card like the INK Bold or the Sapphire Preferred.  It received 10% bonus on each transaction.

This is all staying the same, but one of the big bonuses was the 10 points automatically added to each transaction.  This made the Freedom awesome for all of those little daily expenses that are only a few bucks each.  A $1 coffee came out to 11 points, A quick bite was almost always more than 2x points if the meal was under $10 (like many of mine are).

Each month I usually churned out a steady 500-600 points this way on small transactions.  That adds up to around 7000 points a year or so, and that ends up being $70 bucks in pocket.

Oh I will miss you Freedom 10 point bonus!

The post Chase Freedom “Exclusives” Downgrade appeared first on Credere Argentum.

As I have mentioned on several occasions, I am pivoting this blog a little bit to focus more on investing strategy and stock evaluation.  I feel that the only real safe way to go in investing is to have a long term approach and, preferably and ideally, to never have to sell a stock.  If income is desired, certainly you can sell bits to generate that, but on the whole you should merely let your ownership stake grow and let time work its magic.

Therefore, the absolute most important metric in evaluating a company is its Return on Equity.

I think we can all agree that if we were to start a $100 business, the better investment would generate $20 in net profit the next year vs a weaker investment of, say, $10 in profit.  This is what return on equity is measuring, the percentage of return each shareholder is getting on their investment.  If we are then to move from the basic assumption that we are thinking of the stock as buying the whole business, and we are to become owners and partners in that business for our lives, this would be the most crucial of all measurements.  Certainly, we should subtract from this return the risk free rate of return in a 30 year bond (currently 3%) and the dividend yield (since that will be given back to you in cash each year, you can’t double count it).  The resulting number should tell us if the investment passes initial muster.  All we really then must do is compare it to its peers and begin the all important but somewhat subjective process of analyzing management, their use of debt, and the integrity of the company.

The next step I have been taking is to just then be sure to compare the results to the P/E ratio.  I think it is generally ill-advised to go higher than the average of the S&P 500 and that generally nothing more than 20 gives me a great deal of confidence.  Just because something is making good money each year does not mean that it isn’t overvalued, and that’s why P/E is still important.

Certainly there are many different investment styles and approaches but I feel confident and happy in this one, especially considering my personal goals and purposes for investing which is to generate long term sustainable growth over many years.

The post Return on Equity + Price/Earnings Ratio = The Dynamic Duo appeared first on Credere Argentum.

In this column I would like to highlight a number of items from Warren Buffett’s annual letter to Berkshire Hathaway shareholders.  I hope that this kind of analysis becomes a regular feature of Credere Argentum and I plan on covering each of the letters beginning with the most recent and heading back to the very first letter published in 1977.  Although there are many Buffett fanboys around the internet and probably just about every amateur investor thinks of themselves as a potential investor of Buffett’s class in a way similar to the average golfer dreaming of playing on the PGA Tour, this will be an attempt to understand and analyze Buffett, not merely worship him as an oracle. I hope you enjoy the journey with me.

This year’s letter has a few important insights which I have included below in no particular order:

1. “When the partnership I ran took control of Berkshire in 1965, I could never have dreamed that a year in which we had a gain of $24.1 billion would be subpar, in terms of the comparison we present on the facing page.  But subpar it was.”

Buffett is remarkably fair and modest, to the point of being negative, in how he values his own expertise and success.  Most companies trade at a multiplier to their book value per share (the value of all of their assets divided by the number of shares outstanding) and this makes sense because their earning potential may continue to rise over time and therefore their assets can be expected to rise over time as well.  He compares the growth in book value of Berkshire to the growth of the S&P 500 which is trading at multipliers of the book value of its representative companies.  Berkshire’s book value also includes a negative “hit” for taxes, which the S&P 500 does not take in its growth.  In short, it’s not really a fair comparison, but nonetheless Berkshire has consistently outperformed the broader market index.

The lesson here for the average person, I think, is to value yourself in a similar fashion and build in a pessimistic form of valuation.  This can apply to just about every error of personal finance, be fair but be fair in the “worst way” possible.  This way you bake in value and give yourself a margin of safety.

2.  ”American business will do fine over time. And stocks will do well just as certainly, since their fate is tied to business performance. Periodic setbacks will occur, yes, but investors and managers are in a game that is heavily stacked in their favor. (The Dow Jones Industrials advanced from 66 to 11,497 in the 20th Century, a staggering 17,320% increase that materialized despite four costly wars, a Great Depression and many recessions. And don’t forget that shareholders received substantial dividends throughout the century as well.)

The post Warren Buffett Letter to Shareholders, 2012 (issued March 1, 2013) appeared first on Credere Argentum.