3 Investment Traps - and a Potential Goldmine
- WEALTHY: Why it’s a bad idea to bank on a “solid” name (Andrew Gordon)
- HEALTHY: 3 rules to make sure your diet doesn’t backfire (Craig Ballantyne)
- WISE: Shakespeare on reputation
ALSO IN THIS ISSUE:
- Decoding ETR’s ads (Jessica Kurrle)
- Are you working toward the wrong things? (Suzanne Richardson)
- It’s Good to Know… how to pronounce the nearly unpronounceable names of 6 famous composers
- Add “atrabilious” to your vocabulary
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“Reputation is an idle and most false imposition; oft got without merit and lost without deserving.”
William Shakespeare, Othello
The Business Behind the Name Is What Counts
“Sure, I’ll buy it at that price. That company’s going to be here in 10 years, and it’ll still be here in 100 years.”
I was watching Fox Business News one Friday morning when I heard that statement. I waited to hear the name of the company, but it didn’t come up again. The broadcast moved on to another topic - oil - and my attention was diverted.
Was it GM? Or was it Macy’s? Exxon? Sears? All those companies had just experienced a slump.
As you know, the market is in the doldrums. A lot of companies’ price-to-earnings ratios (P/E) are looking attractive. The Dow’s forward P/E is only 12.8. The S&P 500’s is only 14.7.
There are some upscale names going for downscale prices. It’s a good time to be looking for bargains. But be careful. Yes, the market drags down good companies along with the bad. But the cheapest buys may also be basement bargains for a reason.
Of the four companies I listed above, all have proud traditions and famous names. But I stuck in a clinker on purpose. Did you notice?
Sears is only a shadow of its former self. It was, for decades, the mega-store of its day, marketing thousands of products through the famous Sears catalog. As big as a phonebook, it clued America in to the latest gadgets, fashions, tools, appliances, toys, and everything in between. And America trusted the “solid as Sears” brand and flocked to its stores.
Seems like ancient history, doesn’t it? Sears lost its way… but it didn’t happen overnight. It took years of lurching from one business model to another. During that period, many investors bought Sears for its cheap price and famous name. But the name couldn’t revive the price.
And now both are diminished and will probably remain so.
The retail business changed, and Sears couldn’t figure out how to change with it. But it wasn’t inevitable. With smarter management, Sears could have done much better.
Some sectors are just meant to whither away, however. I loved reading newspapers when I was growing up in Salem, Massachusetts. My favorite journalist? It was William F. Buckley Jr. He was always spouting off. I had a dictionary beside me when I turned to the editorial pages to find his column. It was great. I picked up at least three or four new vocabulary words every time I read him. (When I was a university student in London, a highlight was watching Mr. Buckley debate Mr. Tony Benn, the highly respected leftist intellectual and renowned orator.)
So a few years ago, when I did an online search using some of my favorite value ratios and The New York Times, Washington Post, and USA TODAY popped up, I was more than intrigued. I was kicking myself with delight. With P/Es under 10, how could I not invest in those companies?
Of course, I checked them out - but (in hindsight) with a little less rigor than usual. I ended up going with USA Today. It wasn’t one of my best decisions. The newspaper industry had changed. I knew that, of course. But I had underestimated how much. It was no longer the “easy money” business I had grown up with. In his 2007 Letter to Shareholders, Warren Buffett described it best:
“… the newspaper business was as easy a way to make huge returns as existed in America. As one not-too-bright publisher famously said, ‘I owe my fortune to two great American institutions: monopoly and nepotism.’ No paper in a one-paper city, however bad the product or however inept the management, could avoid gushing profits.”
The Internet - with an almost infinite choice of media outlets fighting for a finite set of eyeballs - took all of that away. I’m afraid the newspaper business as we knew it is gone forever. And bad management had nothing to do with it.
Newspapers were an investment trap. And right now, there are several other traps you should avoid.
• Banks
Do you think the sovereign wealth funds (set up by countries with lots of hard cash on their hands to invest in higher-return assets than government bonds) regret their investments into America’s biggest banks? The banks think so. With their most recent write-downs, they’re giving those funds some of their money back. The government thinks so too. It wants to spend a trillion dollars or more to buy the toxic mortgage debt these banks still hold.
Slicing and dicing mortgages into so-called high-quality derivative instruments and then selling them throughout the world didn’t work out so well, did it? And right now, there’s nothing to replace this market that brought in trillions of dollars to the banks.
• Oil majors
Do the big oil companies have a plan? Doesn’t look like it. Exxon is spending more money buying back shares than in exploration and production. Oil scheduled for delivery eight years from now is trading at less than current prices. Falling future production plus falling future prices adds up to falling profits. Big oil’s business model is broken.
• Any sector that depends on cheap oil
Airlines? Of course. But their headaches extend way beyond expensive jet fuel. Putting thousands of airplanes out to pasture isn’t a good sign. Petrochemical companies? Trucking? Yep. They’re all in trouble. And even if you buy them at cheap prices, their problems aren’t going to go away.
But the auto sector’s not broken. Even GM isn’t broken. Auto companies have to give drivers what they want. And what they want is smaller, gas-sipping cars. If anything, the auto industry can turn expensive gas into an opportunity. When the worst of the recession is over, people will be dying to replace their old gas-guzzlers.
As a matter of fact, when consumers start doing that, it’ll be one of the first signs that the recession is over. Auto companies are going to blast out of the recession and lead the market to higher ground. But only if they give drivers what they want. If they don’t, it won’t be because of a broken business model. It’ll be because of that other -avoidable - disease. Bad management.
The sovereign wealth funds should be investing in the downtrodden auto sector, not banks. The auto companies are your real bargains. Not only in the U.S. but also in Japan, Korea, and India.
[Ed. Note: You can make money just by making smart decisions about where and how to invest. Find a company with good fundamentals, and you'll be sleeping soundly for years. Investment expert Andrew Gordon can help you pick the winners. Learn how here.]
So Simple, You’ll Wonder Why You Didn’t Think of It!
What if everything you want to do could be just a little bit easier?
- That raise you’ve been gunning for could be suddenly within your grasp…
- You could drop that 15-pound “spare tire” from your belly in no time flat…
- More money could seemingly “float” into your bank account…
Sometimes, the most powerful strategies for achieving success are the simplest ones.
But once you’ve mastered them, success is right there in front of you.
Dear ETR: What’s the difference between “Advertisement” and “Highly Recommended”?
“My question relates to an advertisement that appeared recently in Early to Rise. I notice that many of ETR’s articles/ads are labeled as ‘Highly Recommended,’ but this one was labeled as ‘Advertisement.’ Does this mean that this product is not recommended by ETR? How does the recommendation process work? The ad I’m referring to was entitled ‘What George Bush was told behind closed doors.’”
Dave Brown
London, Ontario, Canada
Dear Dave,
We go through the vigorous process of physically reviewing every product that we recommend or advertise in ETR. In order for a product to be sold in ETR, it has to meet two primary criteria:
1. It has to be good for our subscribers - i.e., useful, valuable, and workable.
2. It must complement ETR’s core ideals and values.
We use the term “Highly Recommended” for a product that was created by ETR’s panel of experts or created specifically for ETR. We use the term “Advertisement” when the product was created by one of our partners.
Rest assured that we would never include any product in ETR if we did not stand behind it 100 percent.
I hope this clears things up for you!
ETR Marketing Manager
[Ed. Note: Have a question for one of ETR's experts? Send it to AskETR@ETRFeedback.com and we just may respond to it in ETR.]
Living Rich Isn’t Meant to Be Done Alone
We build wealth for all sorts of reasons. One of the biggest? So we can enjoy a luxurious retirement doing the things we love with the people we love.
But if you’re spending all your time building your wealth, you could be shooting your idyllic future in the foot.
A recent New York Times article referenced one couple who spent years amassing their fortune. Then the husband - and breadwinner - retired. And the pair discovered they’d grown apart over the years and no longer had enough in common to preserve the marriage. “It was the building of this wealth that ultimately led to their divorce,” Melanie Schnoll-Begun of Citigroup, who worked with the couple, told The Times.
Tragic story, isn’t it?
That’s one of the reasons Michael Masterson advocates “living rich.”. What he means by that is enjoying the finer things in life no matter how much - or how little - you have in the bank. Learning to appreciate wine. Eating good meals, Reading the best novels, Listening to music, Watching classic movies, Reading poetry.
And to make sure you don’t end up like that couple I mentioned above? Practice living rich with your spouse. You’ll develop new interests. You’ll expand your horizons. You’ll experience new delights. And because you’re doing it together, you’ll grow closer too.
[Ed. Note: Spending a luxurious retirement with the person you love is well within your reach. And you'll have plenty of time to spend together while you're building your wealth if you do it from home. Learn how you can start a business from your back bedroom... and get dozens of proven ideas for earning $1.2 million or more in 2009. It's all part of ETR's Internet Ultimatum... (continue here).]
Don’t Diet TOO Much
Bodybuilders have long known that if you eat too little for too long, you can actually decrease your resting metabolic rate (the number of calories you burn at rest).
Now, scientists are catching up to our muscle-building friends. Researchers from the Pennington Biomedical Research Center in Louisiana studied long-term dieting in 48 normal-weight subjects.
For six months, one group of subjects reduced their calories by 25 percent. A second group reduced their calories by 12.5 percent and exercised to burn another 12.5 percent of their calorie intake each day. A third group consumed only 890 calories per day until they lost 15 percent of their body weight, and then went on a weight-maintenance diet.
The researchers found that resting metabolic rate decreased after only three months in the subjects who’d reduced their calories by 25 percent. The 890-calorie-per-day group and the diet + exercise group also had a decreased resting metabolic rate, but it took six months for them.
The conclusion: When you diet too hard and too long, your body starts to conserve energy by reducing your metabolism and by decreasing the number of calories burned in any exercise you do.
To keep your resting metabolism high, follow these three guidelines when trying to lose weight:
1. Don’t cut your calories too much. A 10 percent reduction - combined with regular exercise - is plenty.
2. Permit yourself a “reward meal” once a week. Eat your favorite foods, but don’t go over the number of calories you had been eating each day before you started the diet.
3. Every eight to 10 weeks, take a few days off of dieting, and go back to your pre-diet caloric intake.
[Ed. Note: Supplement Craig Ballantyne's diet rules with a fat-burning exercise routine. Learn how to build muscle and blast fat with his Turbulence Training program. And for more advice on how to lose weight, eat right, and exercise better, sign up for ETR's free natural health e-letter.]
It’s Good to Know: How to Pronounce the Nearly Unpronounceable Names of 6 Famous Composers
Figure out how to work the names of the following composers into the conversation, and you’ll impress even the most erudite folks at your next cocktail party:
- Heitor Villa-Lobos (AY-tor VEE-la LOW-bush)
- Antonin Dvorak (AN-toh-neen DVOR-zhock)
- Leos Janacek (LEH-osh YAN-a-check)
- Camille Saint-Saens (ka-ME-YA san-sawns)
- Georg Solti (GAY-ork SHOLE-tee)
- Richard Wagner (RICK-art VOG-ner)
(Source: An Incomplete Education)
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Word to the Wise: Atrabilious
Someone who’s “atrabilious” (at-ruh-BIL-yus) is gloomy or irritable. The word is from the Latin for “black bile,” going back to a time when it was believed that an excess of black bile in the system caused melancholy.
Example (as used by Patrick O’Brian in The Hundred Days): “Captain Aubrey’s steward [was] an ill-faced, ill-tempered, meagre, atrabilious, shrewish man who kept his officer’s uniform, equipment and silver in a state of exact, old-maidish order come wind or high water.”
[Ed. Note: Become a more persuasive writer and speaker ... build your self-confidence and intellect ... increase your attractiveness to others ... just by spending 10 VERY enjoyable minutes a day with ETR's new Words to the Wise CD Library.]
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