June 2009 Archives

Now, as someone who does training and development as a career, I've studied adult learning theory.  One of the foundations of adult learning is that adults learn better when it is relevant.  As I sat there last Saturday re-reading my investment books, knowing that cash was just sitting there doing nothing got me moving a bit.  I didn't feel rushed, but it felt like much more of a priority, for sure.  Learning changes dramatically.

So, I did my homework.  I identified industries where the institutional money is going and that are performing well in the market.  Then I drilled down and found stocks that had solid fundamentals.  The financials were good and the price trend was upward.  Moving on, to the technical analysis, they were moving strong against their moving average in a consistent uptrend.  The MACD and Stochastic were looking good.  In fact, right now, they still are.

Wednesday night, before bed, I logged into thinkorswim and placed my orders.  Before doing that, I calculated my risk.  In all, I would place two trades.  For each, I did my math to ensure that neither would put more than 1-2% of my account at risk.  To do this, I placed a simultaneous BUY order with a simultaneous STOP-MKT order.  The stop orders were placed about 10% below the purchase price.  That way, the maximum loss on either trade would be about 10%.  The market stop order would protect me in case the price went into rapid free fall.  Believe me, I went through all of my books and notes to make sure I was doing it right.  I didn't want to screw up and put in a limit order.  That wouldn't really protect my losses because there are conditions where limit orders won't trigger the sell.

I clicked the confirm button and the orders went in queue, waiting for the markets to open.

I'll admit that I was pretty nervous about it as I peeled myself away from the computer last night to go to bed.  When I woke in the morning, the markets hadn't opened so I went and showered.  Finally coming back to the computer, I saw an alert warning me that my account was not authorized to day trade and if I did it too often, I'd have problems.  Worried, I looked into what happened.

As I pulled up my trades in thinkorswim, I saw my first one sitting there.  It had executed beautifully.  The stop loss was sitting there waiting just in case.  The other trade looked a bit weirder.  Within minutes of the market opening, it turns out, both the buy and the sell orders executed.  All of my homework couldn't prepare me for an odd pocket of volatility on that stock this morning.  I bought at 8:30:07 and sold at 8:32:40.  It was a bit upsetting.

I sat there and watched the stock price jump around.  It dropped down to the mid sixteens and I thought to myself, "Surely this is just odd volatility.  I can buy back in and make my money back as it swings back up where it belongs."

That's when it really occurred to me that the most important thing to learn about investing or trading is market psychology - particularly your own.  Investools lists that as the number one thing you can (and should) learn.

I fought off the urge to endulge my get-even-itis and left for work.  Yes, I learned a lot for my first day.  When trading was done and the market closed, one of my purchases had risen 5%.       That softened the blow of the $0.49 per share I lost on the other one.  I was down about $50 overall.

At first, I was irritated by the stop order.  I was thinking I set it too tight.  Still, if it hadn't triggered, I would have ended my day down $177 on FUQI.  The method did exactly what it was supposed to do in protecting my assets.

I'm also happy with myself for being careful.  I could have bought six, ten, twelve, or more stocks today.  Instead, I went in with about 25% of my available cash and that was it.  While it was not cool seeing that cash sitting in my account doing nothing, it would be even worse to see that cash shrink.  

After this happened, I came across a blog entry by Phil Town that confirms what I was thinking.  In a market like we have right now, there's nothing wrong with sitting on cash.  He points out that Warren Buffett is sitting on plenty of cash right now, just waiting for the right opportunity (http://www.philtown.com/phil_towns_blog/2008/01/cash-is-good-un.html).  There will be plenty of buying opportunities, but patience is key.

I don't regret my trades today.  The jewelry sector is hot and I believe FUQI is a solid buy. The volatility today was in part, regression toward the mean.  The price got too far from its moving average and had to snap back into line.  It's still well undervalued by more than 50%. I may try back in, but I thing I'll let Friday ride out and watch it for another day.

That still leaves us with a lot of debt.  Right now, we all have about $930.9 BN in credit card debt and $1.59 Trillion in other non-credit-card debt.  The numbers don't include mortgages and home equity loans.  The raw data is available from the Federal Reserve.

The Federal Reserve also calculates something called the Debt Service Ratio, or DSR.  This is an interesting little number that compares debt payment to disposable income.  A DSR of 1.00 would mean that, for every dollar we have of disposable income, we owe one dollar in debt.  A DSR of 5.00. would mean that we owe $5.00 for every dollar we have in disposable income.

By disposable income, we're not just talking about money we have to go to the movies or out to dinner.  That is part of our disposable income, but disposable income actually refers to our gross income minus taxes.  Disposable income means all of the money that we have available to us for spending or saving.

Okay, here's where this gets really a bit disgusting.  The overall DSR for the third quarter of 2008 was 13.80, up from about 10.60 in the early 1980s. The good news is that is down from an all-time high of 14.29 in the third quarter of 2007, but it still means that, for every dollar we had to spend or save in 3Q09, we owed $13.80.  Even worse, that assumes that we're only making the minimum payments on our credit cards.  If you want to see it for yourself, you can go to the Federal Reserve Board's Household Debt Service and Financial Obligations Ratios page.

I'm not above this.  I owe more than a year's worth of disposable income on my student loans.  Luckily, I paid off my car at the end of last year.  Many of us have debt for good reason.  We are still wise to get rid of them as quickly as possible.

About a year and a half ago, my sister told me about Dave Ramsey.  When I first heard him, I was a bit resistant.  His attitude towards debt seemed a bit extreme.  Still, I kept listening to his show as a podcast from time to time, and in the Spring of 2008, I took his Financial Peace University at a local church.  I've come to really respect the man and what he teaches.  Now, I have not shredded all of my credit cards.  They're there like a little security blanket, but I avoid using them as much as possible.  Chase just sent me a letter telling me that they closed my account because they figured I didn't need their it because I hadn't been using it.  I'm working hard to get rid of the debt that I have.  I've hear Dave quote Proverbs (22:7) too many times, saying "The rich rules over the poor, and the borrower is servant to the lender."  That is as true today as it was in ancient times.  With a DSR of 14:1, we are certainly not working for ourselves.

So, back to consumer debt.  According to indexcreditcards.com, the average credit card rate in the US was 14.30% on May 20, 2009.  That means, if we make a minimum payment of 3% on our credit cards, we rack up $10.89 Billion in credit card interest every month.

Congress passed the credit card reform bill last month, and credit card companies are squirming.  If we keep up like we have the past two months, though, we can go a long way to reforming credit card companies, and America.  Imagine what we could do with a spare $10.89 Billion each month.  And, in with the markets running down and sideways, paying off our debt has a much better rate of return than most mutual funds going.