Paul Ferraresi

Watching the Dow Jones average approach a higher level, I smiled with peace within myself.

As I have instructed all my students, over the past 35 years, the markets go up and down daily, but, the long-term trend is always up. In fact, the stock market looks like a yo-yo going up and down in the hands of a man walking up steps. Hopefully, you learned from my teachings, and your own research, that equities will always beat out every other asset class over time. You, personally, can remember the Dow hitting 11,700+ in 2000. Then, the tech-wreck and 9/11 caused it to drop to 7,400. If you sold out at the bottom, you probably lost money. If you held on…then, no money was lost. You have experienced and learned a valuable lesson. Buy and hold will always win out (unless there is a worldwide thermo nuclear holocaust – if so, the world is over and who cares). Over these past years, the “drive-by media” simply dumps bad news on you. Even with “all” the bad news in the world, the markets keep going up. (You know, it has been the same bad news reported for the past 200 years.

You know, it is funny, the Investment Company Institute, that tracks individual investor behavior, noted the following: In 1982, when the Dow was at 762, money was flowing out of the stock market. In 1987, at 2,100-2,200, money was flowing in. When the Dow dropped to 1,700, money flowed out. In 1997-2000 money poured into the market during the tech bubble on the way up to 11,700. When the bubble burst and the Dow dropped to 7,400, guess what, money poured out.

From 2004-2007, money again poured into the market as it rose. In the 2008 stock market drop, trillions moved out of the market and into cash. March 9, 2009, the market hit the low point. One year later, the market was up over 65%. Now that the market is back to a level prior to the drop, money is coming back in…just about the time when a mild correction will take place. So, looking back at the recent drop, people poured money in at the top, took a 40-60% drop, sold out at a loss and, now after a huge gain, these same people are investing again near a top. I thought the rule was “buy low, sell high.” The masses are all doing the opposite of buying high and selling low.

Watch…once the “drive by media” notes a new record on the Dow, money will pour in. Enjoy the ride, stay on the course.

Three books on investing reside in my office. Sitting next to Jeremy Siegel’s Stocks for the Long Run is Al Frank’s New Prudent Speculator and Benjamin Graham’s The Intelligent Investor, the bible for value investors. (Warren Buffet proclaims Ben Graham’s book to be the best investment book ever written.) Buffet continues to write “To invest successfully does not require a stratospheric IQ, unusual business insights, or inside information. What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding the framework”.

All great money managers know that emotions are the investor’s worst enemy. Psychologist Kahneman and Tvesky have confirmed in studies that for most people the pain of financial loss is more than twice as intense as the pleasure of an equivalent gain.

How does this normal human tendency make for poor investment decisions? Follow me in a little arithmetic. I give you twenty $1 bills and ask you to make twenty investment decisions based on the toss of a coin. In each round, you can choose not to play and keep the dollar. If you do invest, you will receive nothing if the coin comes up heads, but you get $2.50 if it comes up tails.

Don’t play at all and you still have $20, but assuming an equal number of heads and tails, the investor who plays every single round would end up with $25. I would hope our readers would choose to play every round. However, that is not the way most people act. After a few painful losses they are likely to stop playing rather than stay in the game and let the odds work in their favor.

In “Investment Behavior and Negative Side of Emotion”, published in Psychological Science, researchers studied ‘normal’ participants and individuals with lesions in the region of the brain that controls emotions. In the coin toss game, the brain-damaged players made better investment decisions – they chose to invest more often. Having weaker emotional function, they performed more rationally than investors with normal emotions.

The full text of the report also said that this “myopic loss aversion” explains why so many prefer to invest in bonds, even though stocks have historically provided a much higher rate of return. (Equities have posted annual returns of 10.3% to 12.6%, versus 5.3% to 6.0% for bonds, over the last 80 years.)

Nearly 32 cents out of every dollar spent by American families is for groceries and household items. According to the U.S. Department of Commerce, this percentage is consistently declining – and for persons that are more affluent, the percent allocated for food and drug store items is much lower. The average is three trips a week to the grocery store and one or more stops at a drug or discount store. People are spending money they could otherwise be saving for the future because they fail to compare, shop wisely, and get the best value.

Stores today are cleverly set up and well-merchandised. Manufacturers and food producers fight for eye level space on the retailers’ shelves. They set up elaborate, eye-catching displays. All of this is designed to one specific end. Get the shoppers to spend. In addition, there are also companies that place merchandise in the stores specifically to induce impulse spending.

Consumers may take several steps to spend smarter, reduce the number of trips to stores, and overall spend less money on household and grocery items. Many shopping techniques are habitual. For instance, we frequently go to the same stores, on the same days, buy the same products, and do not use a list or comparison shop.

Economizing on grocery and household items takes imagination, and requires some financial self-discipline, a bit of practice and a little time to develop new habits. It requires full family participation. Having one spouse a saver and the other a spender provides no progress unless the spender ceases to be a shopper. It is also important for children to learn and understand the importance of spending smarter, comparing quality, price and value, in addition to saving to buy the bigger items without borrowing. The NCFE offers the following spending tips before your next trip to the store:

• Use a list when shopping

Put anything you want on the list, but do not add to the list once you get to the store. Using a list will help plan for your needs in advance, so take advantage of sale prices and avoid impulse purchases.

• Go grocery shopping alone after a meal

If you go shopping hungry or with another person, you are shopping for more than one appetite and the result is always increased spending.

• Watch for store ads

Ads are in newspapers, your mailbox and flyers distributed in the stores. Check for sale prices on the items you regularly purchase. Compare prices with other stores, especially those you do not normally visit.

• Pay special attention to sale days

For example, some stores have no sale prices in effect on Monday, traditionally a busy shopping day. Carefully plan purchases, noting on the list which items are sale priced and items where a coupon can be used.

• Always spend cash

Take time to get cash before going to the store. Nothing impacts our mind like taking cash from our wallet or purse. Many people who use credit cards rarely know how much was actually spent, until the statement comes. Many people who write checks simply do not take the time to calculate the balance and have no idea what is left over. Paying cash causes us to think ahead and plan for tomorrow’s needs.

• Take advantage of coupons and rebates; they do add up

Regularly shop at stores that double coupons; take time to watch the papers for grocery coupons. Look for items on the shelf that also have coupons included. It only takes about twenty minutes a week to review grocery ads, clip the coupons and plan a weekly or bi-weekly grocery-spending trip.

• Always shop by the unit price at the stores

In most states, retailers must by law post the unit cost on the shelves. It used to be the larger the pack – the better the price, but that is not always so these days. For example, a 50-cent coupon, doubled on any size of soap detergent could make the smallest size the most economical in terms of least cash spent. Many times, you may get a box of a less expensive detergent, such as the store’s brand name or a generic equivalent for close to nothing, because of the doubled coupon savings.

• Avoid buying plastic bags

Most stores give these away free. Plastic bags are available in the produce and meat sections. Separately bag each item and save them for re-use. When asked if you want either a paper or plastic bag, ask for paper inside of a plastic bag and you will have an ample supply of ready-made garbage bags.

• Avoid buying cleaning aids, cleansers, etc.

They are very costly and prices vary greatly with the brands. Some companies market a cleanser (and now specialty wipes – what a waste) for virtually every type of household project. The best cleanser in the kitchen is simple soap powder in ammonia. No need to buy a brand name; ammonia is ammonia. If you want it soapy, then add some detergent. Another valueless item is dish soap promoted to be gentler to hands or cuts grease better. If your hands are that sensitive, use the longer lasting rubber gloves and save money on detergent by using generic brands. Hot water and any detergent will cut grease.

• Plan meals in advance

Keep in mind wise use of leftovers or freezing for later use when purchasing meats, etc. and making pasta dishes, for example. Consider buying meat items that you use regularly in bigger quantity, freezing for later use those portions not needed that week. This can save up to 20%!

• Avoid prepared items

Cereals, breads, desserts, juices, beverages, etc., mixed and prepared at home are always a better value than pre-packaged items. The same is true for pet foods, and many experts agree dry pet food mixed with water is better than canned food.

• Be cautious about adding non-food items to the list

These include health and beauty items, paper and plastics, utensils, brooms, brushes, film, etc. These items have the highest profit margin for most grocers, which is exactly why they are prominently displayed in the stores. Usually, a better value can be obtained at discount drug stores.

• Stick to the list and plan in advance

Purchase to take full advantage of sale items and two-for-one deals (if the price is not inflated to compensate). When possible, shop the outside walls and stay out of the aisles. Most food stores situate the four basics (produce, meats, dairy and breads) on the walls. They most often place all the cookies, cereals, beverages, canned goods and the nice-to-haves in the aisles.

• Check the checker

Note the prices as you select items and then make sure the same price is posted at the checkout. Check the register tape again after leaving the store, unintentional mistakes are often uncovered, especially with large purchases. Many times a sale price is listed in the store, but not reflected at the checkout.

Finally, if you are trying to spend money more wisely, reading this once will not suffice. Place it in the drawer with coupons and reread it before each shopping trip. You will save from $600 to $2,000 per year, depending on family size and budget allocation.
Source: Institute of Consumer Financial Education (ICFE)

Every workshop I conduct often leads me to ask the participants: “In the future, do you think tax rates will be going lower, staying the same, or going higher?” Without question, 99% of the people vote higher.

One does not need to be a tax attorney to know what is ahead for all Americans. Here is why rates are going higher:

• Congress moves rates from high to low and back to high. You have been in a “low” period.

• Effective 12/31/2010, the Bush tax cuts will expire, so rates go back up to pre-Bush. This means an average of 3-5% higher for every bracket.

• The war on terrorism will continue for another generation and will require increasing amounts of money.

• Social Security and Medicare are broke. The Baby Boomers are just starting to lean on these programs, so both programs will need increasing amounts of money.

• We have a financial crisis not seen in two generations – a stimulus and mortgage bailout program were failures and thus, will require more monies to pay back these borrowed funds.

• The present administration is designing programs so that 45% of American taxpayers (the payers) will provide for 55% of American non-taxpayers (the takers). Thus, the payers (producers) will be required to ante up more for the takers (non-producers).

Now, all the hype has been…”tax the rich.” Be careful what you wish for…you will become part of the rich very soon, according to the present administration’s plan.

• A report from the IRS for the 2008 tax returns filed, only 256,000 returns out of 142 million returns filed, which is the top 2%, had an adjusted gross of over $250,000 (what some may think is rich). This top 2% paid 45% of all federal taxes collected even though they only earned 25% of all income. Hmmm…. I thought the system was to be fair…you know, top 10% pays 10%, top 50% pays 50%, and so forth. Right now, 50% of all those that earn income pays NO TAX!!

• Even if they confiscated 100% of the income of the top 2%, it would not touch the deficit. Do the math yourself.

• They asked Willy Sutton…“why do you rob banks?” He said…“cuz that is where the money is.” Look for Congressional Revenuers to come looking for more money… “where is the money” – the middle class.

To make my point, let’s look at a few new taxes that have come into effect due to the new health care law:

1) Medicare taxes will increase by 0.9% on joint household wages above $250,000 (on 1/1/2013). Thus, if a couple had $400,000 in wages, they would have a new tax of $1,350 ($150,000 x 0.9%). This amount is not indexed for inflation. So, in the future more people will creep into this area. Also, as with every tax they place on high income earners, it eventually goes down to the middle class.

2) The same upper-income couple above will be subject to a 3.8% new tax on unearned income (interest, dividends, royalties, rents, and capital gains). Say our couple earns $50,000 in interest from their bank accounts. This would produce a new $1,900 tax bill for them (sources: House of Representatives and CBO). This will have a dramatic negative effect on savings and the stock market. In all cases, see your tax advisor for details.

3) As you sell your home in the future, there will be a 4% tax on the gross sales proceeds for everyone. (Hmmm…I thought no new taxes on those earning less than $250,000 – then, they said only on those above $200,000, then they said on those above $150,000.)

You know Congress does all its tax planning based on the “static” approach. That is, they assume everything will stay static and no one will do anything to avoid taxes. In our example above, our couple will incur over $3,000 in taxes and they will do whatever it takes to lower or reduce the taxes. This avoidance will lead to less economic growth, fewer jobs, less tax revenue coming in, then they will have to raise taxes somewhere else and…well, you connect the dots. Just cut spending. Stop this madness!!

Now, I have just covered a few of the new taxes. Rather than waiting for the sword to cut you, I am demanding you take action now…or forever hold your peace.

I have been advocating for years to get your money into programs that will allow your money to grow tax-free. You can have access to the money tax-free at any time and when you die, it transfers income tax-free. This strategy is a layup with a ladder, or a stolen base on a wild pitch.

Please contact us at (713) 871-5919 or at conswella@fgmci.com to take action now. If you wait until the rates go up, it will be too late.

Ah yes….discipline or regret.