According to Wikipedia, the Dow Jones Industrial Average was first introduced to the world on May 26, 1896, just over 111 years ago. The original Dow components were:
American Cotton Oil Company
American Sugar Company
American Tobacco Company
Chicago Gas Company
Distilling & Cattle Feeding Company
Laclede Gas Light Company
National Lead Company
North American Company
Tennessee Coal, Iron and Railroad Company
U.S. Leather Company
United States Rubber Company; and
General Electric
I don't know about you, but the only name that rings a bell in that entire list, and the only one of the original list that is still on the Dow to this day, is General Electric.
Here is the lesson that I am taking away from this change in the Dow: given enough time, even the bluest of blue chips fail and disappear. I have to ask myself whether investors in the stocks that faded into obscurity saw the change coming and bailed out and how many of them lost a bundle by betting on these stocks.
When the Dow was first introduced it stood at 40.94. When the market closed yesterday the Dow ended at 13127. So while the index itself soared over 32,000% over its existence, many of the underlying stocks disappeared. This is not exactly a scientific case for index investing, but if you are into stock picking this should make you pause and ponder for a while.
Incidentally, in writing this post I ran a quick calculation based on the numbers I quote above, and it appears that over its entire existence the Dow averaged a return of about 5.4% per year. Does that not strike you as unnervingly low? I think I will dig into that a little bit more. I'll let you know what I come up with.
Tuesday, September 11, 2007
Monday, September 10, 2007
Real-Estate: It's About to Get Worse
It looks like the worst is far from over for the real estate market. The most recent issue of Business Week cited a study published by Banc of America Securities that states that $700 billion worth of adjustable rate mortgages will be resetting between now and December 2008. Compare that to the total of $263 billion of ARMs that reset between January and August of this year. If you believe these numbers the real estate market is about to get a whole lot nastier.
As those ARMs reset and their teaser rates expire, home buyers will be facing higher interest rates and higher monthly payments. It is clear as day that many of them will not be able to handle these higher payments. What's more, if the tightening in credit standards continues, many of these home owners will not be able to refinance their loans and may face foreclosure.
I am guessing that this potential wave of foreclosures is going to add to an already large inventory of houses on the market. In my opinion this means that a substantial decline in house prices is in the cards for 2008. It seems like the truth is even starting to penetrate the fog and haze surrounding the National Association of Realtors. Here is a quote from an article published by the organization on September 5th:
"Pending home sales, a forward-looking indicator, shows existing-home sales are likely to decline in coming months as mortgage disruptions work their way through the housing market, according to the National Association of Realtors.
The Pending Home Sales Index*, based on contracts signed in July, fell 12.2 percent to a reading of 89.9 in July from the June index of 102.4, and was 16.1 percent lower than July 2006 when it stood at 107.1.
Lawrence Yun, NAR senior economist, said abnormal factors are clouding the horizon. “It’s difficult to fully account for mortgage disruptions in the index, and our members are telling us some sales contracts aren’t closing because mortgage commitments have been falling through at the last moment,” he said."
But wait, there is more. In a separate study published by the National Association of Realtors, they also admit that Realtor's Confidence Index was down to 39% in August from 45.1% in July and 51.3% a year earlier. The report also contains the following sentence:
"...practitioners see more traffic from potential home sellers than from prospective buyers."
In economics 101 they taught me that when there are more sellers than buyers prices tend to drop. Incidentally, the confidence index for the West was lowest in the country, at 37.3%. Another couple of interesting insights from the report: according to realtors, 20.3% of their most recent clients wanted to sell their house because "the cost of ownership has become burdensome"... in addition, 40.6% of realtors expect prices in their area to decline in the coming year. Yup, seems like that drug induced euphoria is starting to dissipate...
There is no question in my mind that the housing market has a long way to fall before hitting bottom. The only question is whether it will drag the rest of the economy with it into recession. Sadly, I think that the answer to that question may be "yes".
As those ARMs reset and their teaser rates expire, home buyers will be facing higher interest rates and higher monthly payments. It is clear as day that many of them will not be able to handle these higher payments. What's more, if the tightening in credit standards continues, many of these home owners will not be able to refinance their loans and may face foreclosure.
I am guessing that this potential wave of foreclosures is going to add to an already large inventory of houses on the market. In my opinion this means that a substantial decline in house prices is in the cards for 2008. It seems like the truth is even starting to penetrate the fog and haze surrounding the National Association of Realtors. Here is a quote from an article published by the organization on September 5th:
"Pending home sales, a forward-looking indicator, shows existing-home sales are likely to decline in coming months as mortgage disruptions work their way through the housing market, according to the National Association of Realtors.
The Pending Home Sales Index*, based on contracts signed in July, fell 12.2 percent to a reading of 89.9 in July from the June index of 102.4, and was 16.1 percent lower than July 2006 when it stood at 107.1.
Lawrence Yun, NAR senior economist, said abnormal factors are clouding the horizon. “It’s difficult to fully account for mortgage disruptions in the index, and our members are telling us some sales contracts aren’t closing because mortgage commitments have been falling through at the last moment,” he said."
But wait, there is more. In a separate study published by the National Association of Realtors, they also admit that Realtor's Confidence Index was down to 39% in August from 45.1% in July and 51.3% a year earlier. The report also contains the following sentence:
"...practitioners see more traffic from potential home sellers than from prospective buyers."
In economics 101 they taught me that when there are more sellers than buyers prices tend to drop. Incidentally, the confidence index for the West was lowest in the country, at 37.3%. Another couple of interesting insights from the report: according to realtors, 20.3% of their most recent clients wanted to sell their house because "the cost of ownership has become burdensome"... in addition, 40.6% of realtors expect prices in their area to decline in the coming year. Yup, seems like that drug induced euphoria is starting to dissipate...
There is no question in my mind that the housing market has a long way to fall before hitting bottom. The only question is whether it will drag the rest of the economy with it into recession. Sadly, I think that the answer to that question may be "yes".
Thursday, September 06, 2007
The Cost of Frugality
Is there such a thing as being too frugal? Where do you draw the line? Personally I draw the line at savings that I find trivial and at small, non-recurring expenses. My wife does not share my approach. She is much more frugal than I am, choosing to re-use anything and everything that she can. For example, she has been known to wash and re-use straws and single use plastic forks. Her drawers and shelves are full of items that she very rarely uses, on the off chance that she might need them at some point in the future. As far as I am concerned, anything that says single use on the packaging is headed for the trash once I use it. I am also pretty quick to donate my old items to Goodwill as soon as I decide that I am unlikely to use them in the near future. I don't like the clutter, and I cannot be bothered to try to sell most small things. The time it would take me to find a buyer is more precious to me than the few dollars I could make by going on eBay or Craig's List.
Frugality for me is all about saving, living modestly and reducing waste. However, I try to focus on the big things. For example, driving the same modest car (OK, junk car) for the past eight years has saved us a lot of money and was well worth it, especially since I am very utilitarian about my vehicle. It just needs to get me from here to there. Saving a buck a month by re-using plastic forks simply does not appeal to me.
For me, being frugal with my time is just as important as being frugal with my money, possibly more so. I lead a very hectic life, with three awesome boys to raise, a high stress long hours kind of job and a blog to write on the side. Saving 30 minutes is well worth $10 to me. It's really tough to get an extra half hour to myself, and I am very willing to pay for the privilege. If that means that I am not frugal, so be it. From my perspective, there is such a thing as being too frugal. That boundary is crossed when you start to sacrifice reasonable enjoyment and precious time in order to achieve what most people would consider minute savings.
Frugality for me is all about saving, living modestly and reducing waste. However, I try to focus on the big things. For example, driving the same modest car (OK, junk car) for the past eight years has saved us a lot of money and was well worth it, especially since I am very utilitarian about my vehicle. It just needs to get me from here to there. Saving a buck a month by re-using plastic forks simply does not appeal to me.
For me, being frugal with my time is just as important as being frugal with my money, possibly more so. I lead a very hectic life, with three awesome boys to raise, a high stress long hours kind of job and a blog to write on the side. Saving 30 minutes is well worth $10 to me. It's really tough to get an extra half hour to myself, and I am very willing to pay for the privilege. If that means that I am not frugal, so be it. From my perspective, there is such a thing as being too frugal. That boundary is crossed when you start to sacrifice reasonable enjoyment and precious time in order to achieve what most people would consider minute savings.
$30 for a Free Trial
Free trials offers are proliferating like lobbyists on Capitol Hill. Everyone from Netflix to AOL, and pretty much anyone else you can think of is practically falling over themselves to get you to try their service for free. To get your free trial all you have to do is ask for it... and give them your credit card number.
My story starts with a strange charge for $9.95 that I found on our AmEx a few months ago. Since I could not identify the charge, I asked my wife what it was and she told me that the charge was the subscription fee for Disney's dedicated preschool website. It turns out that Disney offered a one month free trial for use of their educational website aimed at preschoolers, and my wife took the offer and signed up our son. Of course, when she forgot to cancel the service after a month, we got hit with a $9.95 charge. Although she tells me that she has now cancelled the service, it took my wife three months to rid us of the free trial plague. The score: Disney - $29.95; Shadox - small hole in left pocket.
Being a marketing person, I can testify that companies that offer free trials to large groups of customers are working off of averages. They know that some consumers are going to be more profitable and others less profitable. As long as the average profit level they can achieve is reasonable, they are happy. In the case of free trials, companies know that a certain number of consumers will sign up for the service when the free trial ends. They also know that some consumers will procrastinate and end up paying for the service, even though they had no intention of spending a dime.
You know all those "cancel any time" offers you see on TV? Well, they work because people are lazy, and even if they have the best of intentions many consumers simply don't get around to cancelling the service.
So here is my advice to you: the best way to deal with free trials is to not sign up unless you think you are going to keep the service beyond the free trial period. It's not worth it. At the end of the day these free trials can cost you big bucks.
My story starts with a strange charge for $9.95 that I found on our AmEx a few months ago. Since I could not identify the charge, I asked my wife what it was and she told me that the charge was the subscription fee for Disney's dedicated preschool website. It turns out that Disney offered a one month free trial for use of their educational website aimed at preschoolers, and my wife took the offer and signed up our son. Of course, when she forgot to cancel the service after a month, we got hit with a $9.95 charge. Although she tells me that she has now cancelled the service, it took my wife three months to rid us of the free trial plague. The score: Disney - $29.95; Shadox - small hole in left pocket.
Being a marketing person, I can testify that companies that offer free trials to large groups of customers are working off of averages. They know that some consumers are going to be more profitable and others less profitable. As long as the average profit level they can achieve is reasonable, they are happy. In the case of free trials, companies know that a certain number of consumers will sign up for the service when the free trial ends. They also know that some consumers will procrastinate and end up paying for the service, even though they had no intention of spending a dime.
You know all those "cancel any time" offers you see on TV? Well, they work because people are lazy, and even if they have the best of intentions many consumers simply don't get around to cancelling the service.
So here is my advice to you: the best way to deal with free trials is to not sign up unless you think you are going to keep the service beyond the free trial period. It's not worth it. At the end of the day these free trials can cost you big bucks.
Wednesday, September 05, 2007
Recommended Articles
It's time for my weekly review of blog carnivals. As always, I try to review some of the more original and interesting posts published. So, here goes:
Festival of Frugality hosted by Bean Sprouts:
Raising Four Boys has an article about using a timer to speed up showers and reduce water waste. I only want to say: "over my dead body". There are few things in life I enjoy as much as my morning shower, and I am going to stick with it regardless of cost. Of course, they are raising four boys to my three, so maybe it's that fourth little one that tips the scale.
Queer Cents offers an excellent article titled McMansions and the Carbon Tax - apparently there is a proposal circulating for revoking the mortgage interest income-tax deduction for mortgages taken to pay for houses in excess of 3,000 sq. feet. I say, hell yes! While you're at it, why not cancel this regressive tax break entirely? Giving a tax break to home owners is blatant discrimination against renters. Here's a thought: let's tax the poor and give tax breaks to the rich... that's essentially what the mortgage interest tax break is all about.
Carnival of Money Stories hosted by Enough Wealth:
Rather be Shopping suggests a simple money saving tip: ask for a better price. It's probably true, but I have to admit that I find it difficult to go into a big box store and start negotiating a deal. I guess I am not in that kind of mind set when I go to Best Buy.
Reflection of BizDrivenLife points out that some companies improve their bottom line by getting rid of their least profitable customers. For example, his web hosting company kicked him out because he utilized too much of his bandwidth quota (without actually going over the limit). I can certainly understand why companies do this. This strategy makes a lot of sense for them. However, this means that as a consumer you cannot rely on the marketing promises you are given. This is the equivalent of an all-you-can-eat buffet that only allows you to stay as long as you don't eat as much as you can...
My article titled the Most Expensive Loan in History is also included in the carnival.
Carnival of personal finance hosted by Advanced Personal Finance:
Talk about original (and funny). Saving Advice has an article about whether you can save more money by turning nudist. Seriously, this is one of the most unusual personal finance posts I have ever read. I think I'll keep my clothes on, thanks for the offer though.
Penny Closer looks at Five Myths that Can Hurt Your Credit Score. He makes a good point about not closing old credit accounts. The article is well worth a read.
Fire Finance offers a detailed article about how much money you need to save for retirement. The post includes detailed charts - by age and income level - that can give you a sense of whether you are saving enough to replace your current income in retirement.
My article warning IPO Investors to Beware is also included in the carnival.
Festival of Frugality hosted by Bean Sprouts:
Raising Four Boys has an article about using a timer to speed up showers and reduce water waste. I only want to say: "over my dead body". There are few things in life I enjoy as much as my morning shower, and I am going to stick with it regardless of cost. Of course, they are raising four boys to my three, so maybe it's that fourth little one that tips the scale.
Queer Cents offers an excellent article titled McMansions and the Carbon Tax - apparently there is a proposal circulating for revoking the mortgage interest income-tax deduction for mortgages taken to pay for houses in excess of 3,000 sq. feet. I say, hell yes! While you're at it, why not cancel this regressive tax break entirely? Giving a tax break to home owners is blatant discrimination against renters. Here's a thought: let's tax the poor and give tax breaks to the rich... that's essentially what the mortgage interest tax break is all about.
Carnival of Money Stories hosted by Enough Wealth:
Rather be Shopping suggests a simple money saving tip: ask for a better price. It's probably true, but I have to admit that I find it difficult to go into a big box store and start negotiating a deal. I guess I am not in that kind of mind set when I go to Best Buy.
Reflection of BizDrivenLife points out that some companies improve their bottom line by getting rid of their least profitable customers. For example, his web hosting company kicked him out because he utilized too much of his bandwidth quota (without actually going over the limit). I can certainly understand why companies do this. This strategy makes a lot of sense for them. However, this means that as a consumer you cannot rely on the marketing promises you are given. This is the equivalent of an all-you-can-eat buffet that only allows you to stay as long as you don't eat as much as you can...
My article titled the Most Expensive Loan in History is also included in the carnival.
Carnival of personal finance hosted by Advanced Personal Finance:
Talk about original (and funny). Saving Advice has an article about whether you can save more money by turning nudist. Seriously, this is one of the most unusual personal finance posts I have ever read. I think I'll keep my clothes on, thanks for the offer though.
Penny Closer looks at Five Myths that Can Hurt Your Credit Score. He makes a good point about not closing old credit accounts. The article is well worth a read.
Fire Finance offers a detailed article about how much money you need to save for retirement. The post includes detailed charts - by age and income level - that can give you a sense of whether you are saving enough to replace your current income in retirement.
My article warning IPO Investors to Beware is also included in the carnival.
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