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August 12, 2011

PDC #5: Change Your Own Oil, Earn $400,000

A favorite Benjamin Franklin axiom is “Small strokes fell great oaks”. Meaning small actions, done over and over again over a long period of time, can have a meaningful and substantial impact. This is certainly the case when it comes to personal finances. Small savings here and there add up, or I should say, compound up.

One of the things I feel anyone can do to save a few bucks, here and there, over a long period is to change your own oil. It’s really a simple thing to do once you learn how. So today’s Payday Challenge is to change your own oil.

Before I get into the financial benefit of changing your own oil, let me address the most common argument against doing it: time. The common belief is going to get your oil changed at a quick lube place or a local service station saves time. Really? ‘Cause that is simply not my experience. The closest quick lube is a few miles from my house. The ride alone takes 10-15 minutes and that’s if I don’t catch any red lights on the way. Once there, for some reason the “10 minute oil change” advertised on the side of the building never seems to pan out. There’s typically a line and by the time the technicians have finished upselling me on some “Executive Service” of wiper-blade changes and new fuzzy dice for my rear view mirror, I’ve been there a half hour or more. When I have finally returned home, I’ve spent nearly an hour of my day.

A semi-experienced do-it-yourselfer however can change her own oil in 5 and certainly no more than 10 minutes without ever leaving her driveway. Now, that 45 to 60 minutes spent going to and from the quick lube spot may be worth it not to have to get a little dirty. But there’s always soap and water to remedy that situation.

Time savings aside, there is a real money savings to changing your own oil. The way I figure it, a regular oil change, with no added services typically costs about $40 in my area. On the other hand, I can purchase a 5-liter jug of Castrol High Mileage for $25 and change the oil myself. Now a $15 savings may hardly seem worth it. I mean 15 bucks barely buys a large buttered popcorn and small Diet Coke at the movies. But if you were to forego the movie popcorn and instead place the savings in a well-invested portfolio of stocks, it would make a hearty difference in your wealth over the long haul.

How long do you plan on being a driver? For most people, it’s at least 50 years. If you were to change your oil 4 times per year, invest the $15 savings in a general stock mutual fund (which return about 11% historically), at the end of your driving life, you’d have saved over $100,000. That’s the price of two or three luxury-ish cars over that period. If you were lucky enough to find an advisor or fund able to get you returns in the 15% annualized range (not unheard of), you’d have saved about $433,000 over your driving life.

Would you be willing to get a little dirt under your nails for $400,000?

Yes, fifty years is a long time. But that misses the point. Small savings, in several areas of your life, whether it be changing your oil, reducing the minutes on your cell phone, clipping coupons, foregoing a night out drinking or whatever - small changes over time mean a lot and when added together can amount to substantial savings in relatively short order. Imagine you could find 10 other cost saving actions of equal measure. Now we’re talking $4 million. Nothing to sneeze at.


Market

"Why I'm Still Buying Stocks" by Knight Kiplinger, Editor in Chief, Kiplinger publications


Portfolio:

Forest Laboratories Sends Open Letter to Shareholders

"Forest Labs: Proxy Firm Backs Its Entire Board Slate" by Wall Street Journal

"Forest Labs CEO Won’t Be Barred on U.S. Government Contracts, Company Says" by Jef Feeley; Bloomberg


Life:

"Sesame Workshop: Bert And Ernie Just Friends, Have No Sexual Orientation" by Eyder Peralta; NPR

"How Obama Can Win The Fall" by Andrew Sullivan; The Daily Beast

"Whatever You Do, Don't Buy an Airline Ticket On …" by Scott McCartney; Wall Street Journal

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March 10, 2009

Madoff Stole Money And Trust


Click here for video.

The AP reported today that Bernie Madoff will plead guilty to 11 criminal counts including money laundering, perjury and securities, mail and wire fraud and will do so without a plea deal, knowing it carries a potential prison term of 150 years. I find it kind of odd that Madoff would choose not to try and get a plea deal. But just another thing in an odd set of circumstances.

Adding to the weirdness is Madoff's lawyer, Ira Sorkin, and his family were investors with Madoff and lost nearly $1,000,000. Is Sorkin the best to represent Madoff? I know most out there don't really care about this potential conflict in interest. But I will always be a believer that everyone (even accussed money launderers) should be properly represented in court.

I have no idea if this is justice. Madoff seems to have stolen people's trust as much as he's stolen their money (now a reported $20 billion instead of the $50 billion first thought). More and more investors are going the do-it-yourself route because their trust has eroded. The tragedy is most investors going this route will fail. The most comprehensive study on the subject of individual investor performance was conducted by Professors Brad Barber and Terrence Odean. They found:

"Of 66,465 households with accounts at a large discount broker during 1991 to 1996... After accounting for the fact that the average household tilts its common stock investments toward small value stocks with high market risk… …the underperformance of average individual investor household is 3.7 percent annually.

The average household turns over approximately 75 percent of its common stock portfolio annually. The poor performance of the average household can be traced to the costs associated with this high level of trading.... Our most dramatic empirical evidence is provided by the 20 percent of households that trade the most often [with a turnover of 115%]… …the underperformance of hyper trading households averages 7.6 percent annually."

While prosecutor's have recovered about $1 billion for investors so far, how can they recover the trust that was lost? Not an easy question to answer. For our part, we will, over the next couple of days, get back to going through the10 red flags for spotting financial crooks. In the meantime check out parts one and two.

Disclosure: none

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March 09, 2009

10 Signs Your Financial Advisor Is Stealing Your Money (Part 2)

Bernard Madoff
Source: Reuters

Today Warren Buffet appeared on CNBC for 3 hours answering a multitude of questions from Becky Quick, Joe Kernen and a slew of emailers. One emailer from Cincinatti asked "How do we know that you are not another Bernie Madoff?" In response Buffett said:

"Well, that's a good question. I would say this. I--it is a problem with investment advisers. I mean, it--there are going to be a certain number of crooks in the world. And sometimes they're smooth-talking, and the best ones are the ones that kind of don't look like crooks... it is a problem who you put your trust in."

He then later agreed with Joe Kernen that an investor cannot rely totally on government regulation to catch these crooks. So what is an investor trying to protect herself to do?

I wrote a post (Part 1) back in September of last year with the intention of answering this question. This was before the Bernie Madoff or the R. Allen Stanford stories broke. In the post I promised 10 red flags which might alert an investor that his advisor is not on the up and up. I'm finally getting around to listing them. Today I'll do just a couple and get to the rest at a later date.

As a side note, The Wall Street Journal reports that the client list of Bernie Madoff became available to the public. The list contains well known and not so well known folks running the wealth spectrum. The one thing they all have in common is they are all considered sophisticated investors. The list should once and for all prove that "sophisticated" means little in the investment world and underscores my personal pet peeve with the restrictive accredited investor law. I digress.

1. Returns that (nearly) always go up:

If your advisor is reporting returns that always seem to go up, then you should regard his numbers with great skepticism. The markets are controlled by unpredictable human emotion and its movements simply can't be predicted. Madoff's firm produced returns of positive 1% to 2% in gains per month with only five negative months covering a period of 12 years. These types of returns are so improbable that an investor can almost stop here and safely speculate that they've encountered a ponzi scheme or at least an investment manager that is not telling the truth about his returns. But we'll go on.

2. Complex strategies that cannot be duplicated:

When and an advisor has to start using greek letters in formulas to explain his investment strategy, it's time to be concerned. Madoff used an investment strategy consisting of purchasing blue-chip stocks and then taking options contracts on them - a split-strike conversion or a collar. The strategy itself is not complicated. In fact, it's pretty plain vanilla. What was extraordinary are returns Madoff reportedly received with the strategy.

A few individuals attempted to perform due diligence but were unable to replicate the Madoff's past returns. Harry Markopolos was among those that tried. In an interview with 60 Minutes he said:

"As we know, markets go up and down, and his only went up. He had very few down months. Only four percent of the months were down months. And that would be equivalent to a baseball player in the major leagues batting .960 for a year. Clearly impossible. You would suspect cheating immediately... No one's that good."

The above represents a stark contrast to the investment approach employed by Mr. Buffett - value investing. Unlike the method employed by Mr. Madoff, it is niether complex nor does it produce returns that are always favorable. In fact, sometimes years go by without positive results. That's why it is so important to have a long term view as Buffett reiterated today in his interview with CNBC.

BECKY: Yeah. And on a serious note, there are people who look at the stock market and wonder how do they know the whole thing's not a Ponzi scheme?

BUFFETT: Well, the whole thing's not a Ponzi scheme.

BECKY: What--how do they know who to trust?

BUFFETT: We're talking about, you know--we're talking about American businesses that employ, just the ones on the stock market, tens and tens and tens of millions of people. They're real companies... in the 20th century, the Dow went from 66 to 11,000, you know, 400. And we had all kinds of problems during that period. Business works overall. It doesn't work every day or every week or every month, and sometimes it really gets gummed up. And then you need government invention sometimes to get the machines back working smoothly. But the machine works.

JOE: Warren...

BUFFETT: And equities, over time, are the way to do it.

Disclosure: none.

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September 02, 2008

10 Signs Your Financial Advisor Is Stealing Your Money (Part 1)

Hope everyone had a wonderful Labor Day weekend. The weather in the Northeast was great and considering how bad things could have been, Gustav thankfully spared most of New Orleans. As well as enjoying the weather I was able to watch the U.S. Open, take in the movie The Longshots (you know for the kid) followed up with a visit to the park and was able to catch up with old and new friends online (there’s this new thing called social media…).

In catching up with one of those friends, we got to talking about investing and personal finances. Big surprise right? She alerted me to a story of which I was unaware at the time. The story was simultaneously tragic and unbelievable. When I went to Google to read more about it, it then became all too familiar. What I found was yet another story of fraud and deception and the stealing of investor money.

As I read more of the details of this particular yet hardly unique story, the warnings signs seemed so clear to me. I thought to myself, “Some of these investors should have known better!” But alas, even so-called sophisticated investors can be had. No one is immune from making mistakes or getting taken by a sophisticated or savvy charlatan (like the one in the video).

All that said there are steps that can be taken to protect yourself from dishonest (or just plain bad) financial ‘professionals”. It is as important to know what makes a bad financial professional as it is a good one. In at least another two follow up posts I will cover warning signs that should alert any investor their advisor may not be on the up and up.

Have you had a not so pleasant experience with a financial professional? Share it in the comments are of this post.

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About Brick Financial Management, LLC

Blogged by Brick Financial

51 JFK Pkwy, 1st Fl. West
Short Hills, NJ 07078
973-486-9860
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Brick Financial Management, LLC is a Registered Investment Advisor specializing in providing investment management services to individuals, families, organizations and institutions. We implement highly focused stock, bond, and balanced portfolios using an investment approach commonly referred to as value investing. Disclosure

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