Archives For October 2008

I have been a subscriber to the Houston Chronicle for the last several months. It seems like nearly every day there is a front page article about how the low-income housing apartment complexes aren’t being properly maintained. Apparantly, these complexes will get sited for some violation and the landlord will just ignore it.

Some of the stories are just horrendous. I remember reading about a cement staircase collapsing on two boys as they were playing. Then earlier this week a 23-month old boy drowned in a pool because he was able to slip through the iron fence that had missing bars (I won’t go into why the boy wasn’t being watched more carefully). One lady in that story allowed the reporter to go into her apartment. She reported seeing mold, ceiling damage, exposed wiring, and roaches. Pretty bad living conditions if you ask me.

So, here’s my question for those of you who may know:

Is it possible to be a GOOD landlord of a low-income housing complex and still make a profit? Is it possible to keep things from falling into disrepair and still make enough money to pay the bills? Are landlords just greedy or are they fighting a losing battle with tennants who don’t respect the property?

I ask this because I would consider investing in a low-income housing complex IF I could do it right and still make a profit. I couldn’t afford for it be a charity project and I wouldn’t want to do anything if I couldn’t do it right.

Check out this comment from my previous post on the Dow Jones Industrial Average:

I definitely agree that the Dow (DJIA) is built on poor math. However, historical charts of the Dow vs the S&P 500 are almost identical. So I don’t think it’s really that big a deal.

Well, that comment got me to thinking, “Hmm…I wonder how the Dow has performed against the S&P 500 Index over the last twenty or so years?”

I originally tried to go back to the 1950s but I decided to start with 1988 because that was the first year I had monthly total returns for both the DJIA and the S&P 500 Index. I started my experiment on December 31, 1987 and ended it at yesterday’s close (October 27, 2008), using the monthly total returns for each index. I also used a beginning base of 100 to make it easier to compare their performances.

Here’s what the chart looks like:

I started with a base of 100 for each index on December 31, 1987. The Dow closed yesterday at 706.75 while the S&P 500 closed at 549.45, an average annual rate of return of 9.85% and 8.53%, respectively. That’s quite a difference!

From looking at the chart, it looks like the Dow really started outperforming the S&P around the time the tech bubble popped, which would make sense since the S&P had greater exposure to both tech and telecommunications.

Okay, now don’t go thinking I think the Dow is better than the S&P 500 just because it has performed better. I was just curious to see how the two performed side-by-side. I’ll try do some more comparisons in the future.

Yesterday’s Houston Chronicle basically reprinted this October 15th blog post by Mark Cuban: Where to Put Your Money Right Now.

His main point is that it makes no sense to pay interest on debt that is greater than the return on your investments. I agree. However, I’m not sure I like the idea of selling current investments to pay off debt UNLESS that debt is exceedingly high and you have no other means to pay it off.

Unfortunately, I don’t know a whole lot of people who have tons of debt on one side of their balance sheet and lots of investments on the other side. Usually high credit card debt is a symptom on poor money management skills and someone with poor money skills doesn’t usually have investments. All this means is that IF a person doesn’t have the funds available to pay off their debt then they’re going to have to make some decisions and come up with a different plan. But, he is absolutely correct in his pleading for American’s to get out of credit card debt! I’ll second that!

Here’s a quick illustration of how the Dow Jones Industrial Average is calculated.

Below is a table with all thirty stocks in the Dow Jones Industrial Average. The fourth column shows each stock’s daily price change. The last column show’s each stock’s impact on the Dow’s performance, which is found by dividing the price change by the divisor in the fifth column.

Now, before we get a bunch of comments telling us what a bad index the Dow is: I already know that! I just wanted to illustrate how the average is calculated, not critique the index itself.

A couple of months ago I mentioned an interview with Nouriel Roubini, Economist and Professor at New York University. It turns out his assessment on the credit crisis was spot-on. Now he’s a busy man traveling all over the world, talking to people about crisis and what’s to be expected.

Guess what?

He fears the WORST is still to come! From the article:

What does Roubini think is going to happen next? Rather worryingly, in London last Thursday he predicted that hundreds of hedge funds will go bust and stock markets may soon have to shut—perhaps for as long as a week—in order to stem the panic selling now sweeping the world.

That’s right, all the stuff we’ve already gone through is nothing compared to what we face in the near future. Is he right? Let’s hope not!

I got an email last week with a link to Kiplinger’s 10 Things That Are Going Right. Their 10 things along with my thoughts…

1. Oil Loses Its Swagger – prices are down, but I think this is temporary.

2. A Tipping Point for the Auto Industry

3. Interest Rates Are Low and Headed Lower – yeah but will you be able to get credit?

4. Homes Are More Affordable – this is very true!

5. Your Bank Savings Have Never Been Safer –yeah as long as the FDIC can afford to pay!

6. Stocks Are on Sale, and Many Bonds Offer Terrific Yields – can’t argue with this one except to say that they could still go lower.

7. The Miracle of Technological Innovation Continues

8. Prosperity Reigns in the Heartland

9. A New Tone and Direction in Washington – no comment…

10. Shoppers Can Expect Great Gift Buys This Holiday Season – true if you can afford to buy gifts.

Anyway, head over to Kiplinger’s and read their complete list and their thoughts. It’s true that some things are actually going right even with all the turmoil going on around us. I guess it doesn’t hurt to focus on the good (even if some of them are a stretch).

So the market is falling – or has fallen. I don’t want to use the word “crash,” but dropping from 14,000 in October 2007 down to 8,350 today (markets are still trading as I type) is pretty dramatic no matter how you phrase it.

If you believe history – and Warren Buffett – now is an excellent time to be buying stocks. Yes, things could get worse, and yes everything in uncertain, but remember how the whole premise of investing is “buy low and sell high?” Well, stocks are lower than they’ve been in years. Therefore, now is a better time to buy than we’ve seen in years. So if you had no problem loading up your portfolio when the Dow was trading around 11,000, you should have even less of a problem now – unless of course you have no confidence in the markets and you think the whole stock market is going to crash and never recover.

I’m on Team Buffett and see no choice but to assume that eventually, the markets will rise again (given the alternative of stocking up on food staples and hoarding any valuables with which I can barter when our financial systems collapse forever). Of course, “eventually” is the key word. I have no idea if it will be next month, next year, or next decade when the markets recover their losses.

So with regard to my long term (i.e. “retirement”) portfolio, I find some comfort in the fact that my bi-monthly 401(k) contributions are picking up more and more shares as the markets decline. I find so much comfort in that fact that I feel the need to buy as much as possible.

In the last couple of weeks I have invested around $1,000 in stock market index funds outside of retirement accounts (international and domestic) by adding $100 or $200 each time the market set a new “low.” That money would have otherwise gone into cash savings. I also boosted my 401k contribution from 8% to 10%. But I still feel the urge to do more. So I came up with a plan.

I’m breathlessly considering increasing my Roth 401(k) contributions from 10% to 20%. That would mean that in 2009 I would max out my 401(k) – which would be so exciting! I wasn’t planning to do that anytime soon, because it would require the suspension of all non-retirement savings.

But the thing is, all those non-retirement savings will eventually be spent – either on vacations or a car or furniture or a wedding, etc. So while it’s prudent to save for those expenditures, I feel like I’d really benefit more from maxing out my 401k because I really won’t touch it for decades. And besides, I may not work for many years at a job that offers a 401k – and Roth 401k’s may not even exist for very long as congress struggles to balance the budget, especially since they allegedly only benefit rich people (God forbid). So I should take advantage while I can – right?

Should I do it? My emergency fund would currently get me through several months of living if I lose my job, and of course I can always lower or suspend contributions if I get in a tight spot. Plus I’ll put any tax refund and bonus checks into my liquid savings in ’09, so it’s not like it won’t grow…

What do you think??