Archives For May 2007

Well, it’s been a month since I last updated the Magic Formula Portfolio (a hypothetical portfolio I have been following since January). On May 1st, I purchased the third set of five stocks for the portfolio. For more on the selection process, read A Look at Magic Formula Investing. Here’s a look at the last 5 purchases (highlighted in grey) made using the closing prices on May 1, 2007:

Magic Formula 3rd Purchase

Now, here’s how the portfolio has performed so far this year:

Magic Formula Performance Through May 2007

Click here for an expanded table. Not too shabby! Up 17% since January. A total investment of $7,500 (3 purchases of $2,500 each) is now worth $8,776. Even after deducting $199 for FOLIOfn fees for the year, the portfolio is still up 14.36%. Keep in mind that the $199 fee is fixed so the larger the portfolio the smaller the fee will be as a percentage of the portfolio. In other words, the $199 fee seems excessive but that’s because we are dealing with a small portfolio.

I’ll make the fourth and final purchase in early July.

To read more about this portfolio, see these posts:

Magic Fomula Portfolio April Update

A Look at Magic Formula Investing

Magic Formula – Portfolio Update

Magic Formula Investing Update – 2nd “Purchase”

DISCLAIMER: This is a hypothetical portfolio and is in no way a recommendation. Invest at your own risk.

You may have noticed that my blog has been loading extremely slowly the last coupld of days. I’m working with my host to get it straighted out. Here’s the email I got from them yesterday:


There were a few users on the machine using more that their fair share of system resources. The machine is now stable. Sorry for any inconvenience this may have caused. We will monitor to ensure that the machine continues to operate at optimal performance. If you have any additional questions, please let us know.

Well, today it’s doing the same thing so I sent them another email. Hopefully we’ll get this straightened out. Until then, please bear with me.

I came across a couple of interesting articles yesterday regarding subprime mortgages. The first article, Wow, I Could’ve Had a Prime Mortgage, was enlightening. It seems that people who didn’t know any different were given subprime mortgages even though they qualified for a prime mortgage. OUCH! Why would such a thing happen? Well, this portion of the article explains why (bold emphasis mine):

Some consumer advocates blame loan officers and mortgage brokers who steer borrowers away from prime loans because they can make much more money from the subprime market.

“Dollar for dollar, it is much more lucrative for a broker to sell subprime loans,” said Allen Fishbein, a director of credit and housing policy for the Consumer Federation of America.

“I have a friend who interviewed for a job with my company,” said Hardester. “He told me, ‘I’m not coming to work for you. I can’t make enough money.'”

The friend, who had been working in the subprime industry, told Hardester he was used to getting an average of five points-plus for each loan he originated; that’s more than $10,000 on a $200,000 mortgage. Hardester’s company writes mostly prime loans, where the margins are much thinner – around 1 percent or less.

There’s your motivator right there: money. When a broker can make $8,000 more by selling a crappy product than he can make selling a decent product, he’s gonna sell the crappy product. Forget about doing what’s best for the client. Sell the product first and then justify it later. Most of the brokers who sold these subprime mortgages did nothing wrong legally. However, one has to question their ethics, especially if the client qualified for a prime mortgage but was sold a subprime mortgage.

The second article I read was a front-page story in the Wall Street Journal titled ‘Subprime’ Aftermath: Losing the Family Home($). The article profiles several families from a neighborhood in Detroit. The article made me angry for two reasons:

1. How could people be so stupid (or niave)? and…

2. How can lenders justify these types of loans?

Here’s the story of one lady and her husband:

April Williams was feeling the pain of the downturn back in 2002, when she saw an ad from subprime lender World Wide Financial Services Inc. offering cash to solve her financial problems. At the time, production slowdowns at Ford Motor Co. were squeezing her husband’s income from an assembly-line job, and they’d heard rumors that more cutbacks were coming. Still, after a loan officer from World Wide paid a visit, they became convinced they could afford stainless-steel appliances, custom tile, a new bay window, and central air-conditioning — and a $195,500 loan to retire their old mortgage and pay for the improvements. The loan carried an interest rate of 9.75% for the first two years, then a “margin” of 9.125 percentage points over the benchmark short-term rate at which banks lend money to each other — known as the London interbank offered rate, or Libor. The average subprime loan charges a margin of about 6.5% over six-month Libor, which as of Tuesday stood at 5.38%.

“I knew better than to be stupid like that,” she says. “But they caught me at a time when I was down.”

It would be nearly impossible for most people to afford that! According to Bankrate, the current six month Libor rate is 5.38%. So, after two years, this lady was going to be paying around 14.51% interest on her mortgage (9.125 + 5.38 = 14.505). For the first two years she would be paying over $1,679 per month, which would jump to $2,376 per month (that’s over $28,000 per year)!

Something I would like to know is whether or not she knew all of this information? I can’t imagine anyone signing up for something like this if they knew these numbers. Regardless, she was incredibly niave to get suckered into this deal.

That’s just one of the many stories regarding this mess. I have a feeling that we are only seeing the beginning of this.

Oh, and here’s a little message for the mortgage brokers who hawked these loans: Enjoy it while you can because everyone knows that a man reaps what he sows.

After reading The Maker’s Diet by Jordan Rubin, my wife decided that it was time to start buying organic milk. The only problem I have with this is that it costs DOUBLE the price of non-organic milk, which is already expensive enough. We normally buy four gallons of milk per week. At $3.oo per gallon (sometimes we can find it cheaper), we are spending $12 per week on milk. Now that we are buying organic milk at $6 per gallon, we are spending $24 per week on milk.

Is it worth it?

According to Rubin who quotes William Campbell Douglass, M.D., author of The Milk Book, we unknowingly ingest the residues of as many as one hundred different antibiotics when we drink a glass of commercially processed milk. It sounds pretty bad. However, yesterday I read Organic Milk: What You Get For the Money, on MSN and it basically says that organic milk isn’t worth the cost.

It’s both confusing and frustrating to try to do the “right” thing. There’s so much conflicting information out there. One source says “do this,” while someone else says “quit doing that and do this instead.” It’s also important to check the motives of these experts. Jordan Rubin may be a fine person and all, but he does sell his own products. It doesn’t necessarily make him an unbiased authority.

Bottom line: The MSN article didn’t convince my wife so it looks like we’ll still be buying organic milk even if it costs us over $1,200 per year! OUCH!

Last week I received three copies of On My Own Two Feet – a modern girl’s guide to personal finance by Manisha Thakor and Sharon Kedar. It’s a great little book for beginners. It covers the basics that everyone (guys and girls) should know about personal finance without going into too much detail.

The book is arranged in three parts with several chapters supporting each part. The parts:

Part A – The Tools for Financial Empowerment

Part B – The Path from Saving to Investing

Part C – The Strategies for Real-Life Situations

The authors address all the personal finance basics like the time value of money, budgeting, credit cards, credit scores, investing, and insurance. I also enjoyed the appendix of the book with its charts and sample budget forms.

What did I not like about the book? Nothing really. Sure, of the information is redundant if you are already familiar with personal finance. However, I tried to keep in mind while reading the book that the authors weren’t really talking to me. If I were reading about personal finance for the first time, I would have found the book very enlightening.

Finally, although the book is written for women, the concepts can be used by both men and women. The book could have just as easily been written for both sexes.

Would you like a copy?

I have THREE copies of this book to giveaway. If you would like a chance to win a copy, just leave a comment. The only requirement to entering the contest is that you be a resident of the United States or Canada and that you leave only ONE comment. I’ll randomly select a winner on Friday. Have fun.

UPDATE: Wanda over at Well-Heeled interviewed the book’s authors.

JLP’s Weekly Roundup

May 29, 2007

Here’s some of the highlights from the MoneyBlogNetwork:

MBH has a Commentary on What Minimum Wage Would Buy.

FMF says that the Presidential Hopefuls are Loaded.

Nickel with Bogle’s Favorite Mutual Fund Companies.

How about $8,000 Worth of ‘Forever Stamps?’

What’s the Relative Strength Index?

If Hillary has any hope of getting elected President of the United States, she better rethink her “economic vision.” From Yahoo!:

Presidential hopeful Hillary Rodham Clinton outlined a broad economic vision Tuesday, saying it’s time to replace an “on your own” society with one based on shared responsibility and prosperity.

The Democratic senator said what the Bush administration touts as an “ownership society” really is an “on your own” society that has widened the gap between rich and poor.

“I prefer a ‘we’re all in it together’ society,” she said. “I believe our government can once again work for all Americans. It can promote the great American tradition of opportunity for all and special privileges for none.”

This coming from a woman who flies all over the country in private jets. There’s no “special privileges” there.

It bugs me when politicians (ALL POLITICIANS) have these grand visions but really have nothing substantial to present so that people can make an educated decision on what’s best. Nothing seems to be based in reality.