Canadian 30 Year Olds are Screwed

I quite enjoy working with young Canadians on their finances. Often financial advisors refuse to help young people because they don’t have enough money. I don’t look at it that way – at around 30, some of the biggest financial decisions of one’s life are made:
selecting a career, marriage, having children and purchasing a home – for many, the largest financial decisions in their life happen in a pretty tight time window. With so much at stake, making the right structural decisions are vital –for it sets the stage for the rest of your life. Make the wrong decisions and there may be no recovering.

So let me describe my last five years and why I am worried about young people. I feel there are a combination of circumstances that have come together (a perfect storm, so to speak) in recent years to make it almost impossible for young Canadians to get ahead long term. These variables are as follows:

People Spend More Time on the Internet than their Finances

There has been a culture shift in the last 20 years to almost a complete disregard for being responsible with our money. We have all heard about the war and depression era elders who drive their cars for ten years, don’t use credit cards, saved regularly and paid off debt fast. Today’s young even look at these wise old folks as backward, “cheap”
and out of touch. Frankly, it is the young people who are on the road to financial ruin –
today’s attitudes are almost the complete opposite of our grandparents where “put it on
plastic and pay later”, take as much debt as we can get, pay off mortgages over 35 years,
lease cars, $20,000 vacations and $300 shoes or concert tickets is a norm. Since when
does a 16 year old need a $100/month IPhone? Part of this attitude I blame on parents
where, at any income level frankly, the parents give the kid whatever they want –
lucrative allowances with no work behind them or simply jut an attitude of you spend
and daddy & mommy will pay. Unfortunately school budgets (and perhaps priorities)
also leave our high school kids woefully lacking in basic financial knowledge ‐ there are
no courses on how to manage credit cards, how financial institutions work, what a stock
is, when to save for a house deposit, details about disability insurance and so on. After
school, our kids don’t have a clue about basic money management. As one 60 year old
recently told me: “Kurt my 26 year old daughter lives at home with us, only has a part
time job working in a mall, spends $4 every four hours on Latte’s, orders $30 pizza delivery weekly, just came back from a week in Cuba and doesn’t have two dollars in an RRSP, Tax Free Savings
Account or even a basic savings account. Worse she could care less about learning about finances – she is more
concerned about how many friends she has on Facebook”. Folks, these are our young people: you have all seen
them – without the basic common sense around personal finance they eventually turn into 30 year olds that make up
the rest of this story. And then 40 year olds who are swimming in good cash flow (often six figure family incomes)
yet can’t manage an RRSP contribution yearly but are happy to pay a lawn service company $500/year to trim the
shrubs. Education about basic finances should start at 10 years old – take your kids to the instant teller with you
‐ show them how it works and build from there.

I Wish I Had my Grandpa’s Pension – but I Don’t

No one has pensions anymore. When our 80 year old parents worked 30 years ago, most Canadians could count on a sweet defined benefit pension to be waiting for them at retirement at age 55. This guaranteed pension provided a permanent base of cash flow, often inflation indexed as well, alongside CPP and OAS until death. While our parents
didn’t have a lot of money for new cars and big vacations thirty years ago, they did have a fine quality of life and
lived within their means. Today, defined benefit pensions are almost entirely gone – unless you are a teacher, police
offer, nurse or one of the few lucky souls in a couple of big companies that still offer
them. The rest of us have been left to fend for ourselves – either with no pension
plan at all, or a basic group RRSP or defined contribution plan that offers no
guaranteed pension. What you and the company contribute is all there is. This is a
far cry from a defined benefit pension plan and will leave most employees with
shockingly little to live off at age 60 or 65. In 10 years of reviewing DC employer
pension plans I have yet to see a single plan that would provide an exceptional
quality of life in retirement. To make matters worse, most employees in big
companies get no educational planning support around these company savings
plans, and have no clue how bad off they truly are.

Add to this that the typical 30 year old may have six different employers (or careers) due to restlessness or
terminations before they retire – this means that the employee is never anywhere long enough for much pension or
other compensation to accrue. Again, reflect on the past: our parents worked for one employer their entire life,
were extremely loyal and benefited from seniority, unions and growing compensation, pensions and benefits the
longer they were there. Most of that is gone today. It is routine to see 50 year old professionals that have had three
or more employers (so far) and with retirement only ten years away, have little or nothing to show for it financially.

Debt Disaster Cause by Choking Real Estate

People have gone real estate crazy in the last decade as the low cost of mortgages has caused a frenzied market for
the purchase of detached homes, condos, cottages and spurred massive renovations to existing properties. “Starter
homes” in major Canadian cities can cost more than $500,000 today – prices that twenty years ago were considered
only available to the wealthy. Now 30 year old kids making $60,000 a year are getting mortgage approvals to carry
massive mortgages and think nothing about amortizing it over 35 years – ridiculous. Further, thirty five year olds
think nothing about dropping $50,000 on a kitchen upgrade or a bathroom because, after all, it has to be done – we can’t live like this. On top of the monster mortgage, these kids are carrying sometimes six figure lines of credit as well. All these 30 somethings are leveraged to the hilt. No wonder the papers are full of stories of how Canadians now have some of the highest debt levels in the world – I have seen this happen over the last five years – my life has been full of dealing with everyone’s 30 year old kids. The story has been the same every time: recently married or a baby on the way and they want to buy a home. I ask them what they have saved for a deposit – often no more than $10,000 between them both. Perhaps their parents are chipping in some cash. And they want to borrow from their RRSPs through the Home Buyer’s Plan – always a terrible idea – stealing from the longer term goal of retirement.

I pull out my calculator and tell them how much they can afford. Off they
go. A week later I get a call to say they bought a home. Did they stay
within my limit I ask? Well….no, there was a bidding war. I am horrified
to learn that they spent $50,000 more than planned. And that’s before
closing costs and furniture, property taxes, a new roof and a new car to
commute. The stage is set for disaster now. When a couple commits to a
huge mortgage that commits more than one third of their net cash flow to
debt servicing and fixed costs of ownership, the cracks in their life will
start to appear after a few years. Unless they have huge annual incomes,
there may be no extra money for vacations, for renovations, to buy new cars or even basic furniture. Inevitably
these costs end up on lines of credit, adding even more debt, well, because, they have to have it. I have routinely
walked through the homes of couples that are so burdened by big debt that rooms in the home have no furniture.
I know why: there is no money for it. Sometimes this can even lead to divorce.

Interest Rate Ticking Time Bomb

Next is interest rates – Canada is full now of monster levels of mortgage debt for the
average Canadian all financed at floating 1% mortgage rates as Canadians have taken
advantage of the record low rates to buy homes the last few years. So, all the kids with
the mega debt are floating in variable rates at 1%. What happens when (when, not if),
mortgages rates return to traditional levels of 5% to 8% for a five year closed
mortgage? Is this on the horizon? Are we currently the US market three years ago,
slowly heading towards real estate disaster in Canada? Will mortgage rate resets over
the next several years cause mortgage payments to balloon, young couples to declare
bankruptcy as they crumble under the weight of debt and bring our tiny real estate market crashing down to levels never seen before? Never happen right? Let’s hope not.

Not Much Changes at Age 40

Since you left high school and could enter the work force, age 40 is the half way point up the hill towards potential
retirement at age 60. You have already spent 20 years building wealth and what do you have to show for it?

If these 30 year olds do survive the first few years of mega debt levels, what about the long term? Ten years later at
age 40, with so much money going from every pay cheque into mortgage payments, car lease payments and credit
card payments, 40 year olds are often woefully behind in savings for their children (RESPs) behind in their RRSP savings and likely don’t have a dollar in Tax Free Savings Accounts yet.

The Kids Go To College Before You Retire

Let’s start with the kid’s savings – if you had kids around age 30, the kids are now heading to university in only ten
years when the parents are 50 years old. With the cost of four years of university easily approaching $100,000 per
child in 2011, failing to put gobs of money away for the full 18 years of the child’s life could see parents buried under
new debt, school debt, at age 50. You need to be mortgage free by age 50, 55 at the
latest, to create extra cash flow to help the kids through school. That’s why 25, 30
and 35 year mortgages are insane. Twenty years max – or don’t buy the place
because you can’t afford it. If you have any plans to retire around age 60, you need
that last ten years to be putting money into savings during what is supposed to be
the big income years of your life. But if you float through your 50’s paying for the
three major financial goals of paying off debt, retirement savings and kid’s education,
I fear that on a regular wage you won’t be retiring at age 60 – not even close. And, if
you had your kids later in life like many are today, don’t plan on retiring until they
are through post secondary school. That’s a good general rule to follow – not too many folks can afford $10,000 tuition fees on a retiree’s income.

What Do You Need for Retirement?

At age 40, with retirement ideally only 20 years away, you need to save a good $1.5 million dollars quickly. Had you
started at 22 and put the $4 Latte money (and more) into a new RRSP, savings at age 40 would have you well down
the road to proper retirement savings by now. But now, only starting to focus on retirement savings at age 40 is
almost certain doom unless you start to save massive amounts fast and yearly without fail. Even twenty years out
from retirement we are in the homestretch already – there is not even enough time to benefit from the compound‐
ing impact of savings. Add to this that bond yields are at record lows (around 2% for a one year GIC currently,
March 2011) and the new stock market seems to have a major correction every five years, and you need to save
even more than you thought. A lot more.

At 40, with career developing, family established and home purchased, now is the time to buckle down and save for
your financial goals – it is not the time to do a kitchen renovation or buy a second residence. You can retire on plan
but it requires disciplined savings – tying up more money in real estate that I don’t believe you will ever sell or downsize doesn’t help us with your retirement needs. And be careful: planning to work until you are 70 is not the
easy answer either – sure, you can plan to work but a stroke, heart attack or even a car accident can retire you early.
Without proper savings in place, a premature retirement due to illness may leave you with 40 years of a less than ideal quality of life. Practically, we all need to strive to have our financial savings in place by age 60 and work because we want pocket change beyond that, not because we need to work. If you don’t have your core savings levels reached by age 60 and must work to eat, then back up your income by top notch disability and/or critical illness insurance until you do retire.

Waking Up 50 One Day And Getting the Deer in the Headlights Look

Age 50 in Canada is an interesting age today. I do more financial planning for 50 year olds
than any other age. It’s like they woke up one day and a light went off – that after 20 years
of working hard, raising a family and paying off a home they pop their head up and realize
they don’t know where they are. The three major finance issues are suddenly converging
all at once: they are supposed to be mortgage free at age 50, the kids are starting university
next fall and $10,000 of tuition is due now and lastly they realize retirement is supposed to
be ten years away. Holy smoke – all at once. Welcome to age 50. Are you prepared? So in
my practice we prepare a financial plan based on their goals and show them how to achieve
all three major financial needs. Today’s 50 year old will make it – they are the last
generation to get in before the big mortgages hit and they may still get inheritances from
their financially responsible, recession era parents who will die in the next 20 years,
providing money for their retirement thankfully. It’s today’s 30 year olds who will be 50 in
twenty years that are screwed. With little hope of being debt free in 20 years, with a bad
attitude towards savings and debt elimination, with rising costs of children’s education, no
pensions coming, frequent career change, wild stock markets, record low interest rates and longer and longer life with rising health care costs, today’s 30 year olds need to win the lotto to have a hope of achieving their financial retirement as culturally expected in Canada. Working to age 70, albeit part time, may become the norm for many in the next twenty years.

There Is Hope

It doesn’t have to end up this way. Having your cake and eating it too is possible with a bit of fiscal responsibility
starting now – and keeping it in check forever:

Massively limit what you invest in your home. You cannot afford to pay big mortgages for decades. You need to get
debt free fast (by age 50) and move onto the other goals of saving for kids and your retirement. Do not buy bigger
homes. Do not do big renovations. Do not purchase second recreational properties. I am ok with a rental property
as it will contribute to your finances long term. The average Canadian family without pensions cannot afford big
real estate investments and hope to achieve their other goals ‐ plain and simple.

Select employers and careers that offer defined benefit pensions. Ok, this is far fetched, but having the employer
taking care of your retirement savings is a huge weight off your back and allows you to focus on children’s savings
and debt elimination. You may be more likely to achieve all your goals if the most expensive one of all, retirement, is
taken care of by your employer.

Save more – what is remarkable is the number of people I see that have six figure
annual incomes and little or no savings. We all have the ability to save and pay down
debt faster, but we have to want to do it. This all can end up well, if you want it to. I
see families of four living successfully in expensive Toronto off $50,000 a year. I see
folks earning $150,000 a year who cannot save $10,000. Set some rules for savings
and stick to them. No matter what.

Plan to live off less in retirement. I don’t recommend this but it is an option. It is
hard to do because people are living longer and it is getting more and more expensive
to live. Look at how gas prices change day to day – who knows what it may cost to
live forty years from now –plan on living to age 100 ‐ likely one spouse might – it just
may happen and you don’t want to be broke. It bugs me when I read the news and see
so‐called experts telling readers that you don’t need to have a lot of money to retire.
I agree, you don’t. We can move you up to northern Ontario where you can buy a home for $50,000, play cards all
winter, never buy new clothes, a new car or take an out of province vacation. Sure, we can all do that. But in today’s modern age of “me, me, me, buy, buy, buy, want more, want more, want more, who wants to live like that? And there’s the rub: people today want to take big vacations, they want the latest IPad, they want HD cable and a smart phone – all of this costs money. No one wants to live like his or her parents did 30 years ago. Today we all want nice things, always. Well, nice things cost a lot of money – money you don’t have if you don’t follow the rules in this article.

Work longer. Ok, here’s a happy spin on working past the traditional retirement ages of 60 or 65. Plan to work to age 70. But work part time. Do something you love. Limit the commute. Take summers off. You will never regret the freedom you will have – freedom to spend at will, freedom to travel, freedom to help the kids out and freedom to join the country club. But work by your rules and do it longer. If you don’t do this, you’ll have to work by my rules in retirement: a strict budget, where I review your costs and have to approve what you spend. You don’t want this. You don’t want to have to tell your spouse at age 72 there isn’t enough money to winter in Florida this year. You don’t want to have to look at your investment portfolio everyday and wonder if there will be enough. Plan ahead.

Don’t let this be you.

Final Thoughts

In closing, I saw an ad recently that showed that Canadians spend ten times (more actually) more time watching videos on line than they do looking at their finances in a year. In many ways, that really sums up this article and my concerns for today’s 25, 30 and 35 year olds. The solutions are at hand – it comes down to how you play your cards. Look at yourself right now: today, in your career, while the money is flowing, life is good, and it seems like it always will be. You really deserve that week in Barbados and retirement savings can start next year. One more thing on the credit card Kurt, and then I promise I’ll be good.

Living for the short term and then you wake up one day and you are 40 and still living this way with little savings and a lot of debt is showing the signs of problems raised in this article and sadly, possibly creating the potential to not reach your financial goals and dreams long term. Get a financial plan. Establish short term, medium term and long term goals. Write it all down. Implement strategies. Follow up. Measure progress. Adjust the plan. Repeat year after year. Use a financial planner to keep the plan objective and non‐emotional. Good luck Canada.

Source: Kurt Rosentreter, CA, CFP is a Senior Financial Advisor with Manulife Securities Incorporated in Toronto, a Chartered Accountant and national best selling author on personal finance in Canada.

Avoid being a horrible investor

1. Do little or no research before buying a stock.
Would you trust a stranger to take care of your kids or drive your car? Then why would you entrust your portfolio, your hard-earned money, to the hands of management teams and businesses that you hardly know?

If you want to make blind bets, head to Vegas. It’s more fun losing money in a casino than in front of your computer. While you’re at it, you could do a little research on casino stocks, and you’ll see that the house always wins — especially when companies like MGM Mirage (NYSE: MGM), Las Vegas Sands (NYSE: LVS), and Wynn Resorts (Nasdaq: WYNN) dodge their financial problems for an amazing 2009.

Remember, every time you buy a stock, there’s someone on the other side of the trade. Consider these other people the “house.” If they know more than you about the stock, you’re at a disadvantage.

2. Buy stocks based on tips and rumors.
In my life, I’ve gotten two tips that could be construed as insider information, which I declined to act on. Both tips were of the “I have a friend, who knows a guy, whose cousin” variety. Anyways, I checked out the tickers about a year after hearing the tips, and both had plummeted.

3. Be an envious investor.
Charlie Munger often states that the worst of the seven deadly sins is envy, because other sins, like lust or gluttony, provide the sinner with pleasure. Envy, on the other hand, has no pleasurable aspect whatsoever.

I blame envy for a lot of things. I think envious investors bid stocks like eBay (Nasdaq: EBAY) and Yahoo (Nasdaq: YHOO) up to amazing heights during the tech boom, and Crocs (Nasdaq: CROX) to over $75 a share two years ago. I think envy drove Shaq and Kobe apart and effectively dismantled the Lakers dynasty — at least temporarily. I also think envy causes the average investor to get swept up into bull markets and decimated in the subsequent crashes.

4. Invest with low conviction.
Doing a lot of research doesn’t help much if you don’t stick around to reap the benefits. I think investing without conviction is like marrying someone you just met a week ago. After the initial honeymoon phase, failure awaits after the first set of speed-bumps.

When investing in stocks, I can almost guarantee you won’t catch the bottom. There are just too many random factors involved in the collective buying and selling activities of millions of people around the globe.

In fact, I think investing without conviction almost guarantees failure. Let’s say you were smart enough to figure out that Apple (Nasdaq: AAPL) was a bargain back in 2001, and bought in the $10-12 range. The stock had cratered more than 70%, so investors could reasonably think that was the bottom of the barrel.

Unfortunately, everyone who invested in Apple’s stock in 2001 would’ve seen their investment fall around 20%-30% over the next year. They’d also have to wait nearly two years just to get back to breakeven. Many investors would not have the conviction to ride out this storm, and would have bailed out at a loss. However, those with conviction who held on would be sitting on a 20-bagger, with the stock currently above $210 per share.

5. Fail to separate price from value.
Oddly enough, we have no problem distinguishing between price and value at the mall. We don’t say, this Gucci handbag is worth $3,000. We say, wow, that handbag costs $3,000. What a rip. At the mall, we know that the price people want us to pay, and the value we receive, can be two very different things.

The same rules apply to the stock market. For most companies, share prices move around a lot more than intrinsic value. Sometimes the two move together, sometimes they don’t — but they’re two very different things.

The investor who fails to discriminate between price and value fares no better than the tone-deaf contestant in American Idol. Both lack vital ingredients for success.

Final thoughts
So there are a couple of examples of what not to do. If you eliminate as many bad investing habits as possible, you might just turn into a great investor.

Source: Fool.com

So if you’re looking for ways to accelerate your retirement, here’s how you can move the date of your retirement party up a few years:

1. Add cash.
Yes, it takes money to make money. So the first step in starting and growing your retirement nest egg is finding ways to get more cash into your retirement accounts.

When times are tight, saving more can be a tall order. But you may get some help. If your employer offers a matching contribution to your 401(k) plan, you might double those extra savings. Similarly, Uncle Sam offers benefits in the form of deductions for contributions to 401(k) plans and traditional IRAs, as well as tax credits for low- and middle-income taxpayers who contribute to IRAs.

It takes a little more than $550 per month in savings, earning a 7% return, to get to $1 million over the course of a 35-year career. But if you can add just $100 per month to that — including what your employer puts in and your tax savings — you can cut more than two years off your wait.

2. Embrace stocks.
Saving more is great, but there’s only so much you’ll be able to put aside. You have to make the most of what you have.

People are often too conservative in their retirement investments. Despite the sometimes violent ups and downs of the stock market, the long-term return on stocks far exceeds that of less risky investments like bonds and bank savings accounts. If you have all your money in cash, you won’t lose a penny — but you’re lucky to make 1%-2% right now. Even target funds and other balanced retirement options have sizable portions of their assets in bonds.

A 7% return is a reasonable average for a portfolio that has slightly more in bonds than in stocks. But throughout most of your career, you can afford to take more risk. Owning more stock could raise that return to 9%, lopping off almost five more years from your target.

3. Hit for the fences.
If you only want to match the S&P 500, buying index funds is easy. To get higher returns, however, you’ll have to find stocks that will outperform the index. Here are some examples from the past 20 years:

Those stocks have done particularly well, especially given how badly stocks have done since 2000. But you don’t have to belt all your picks out of the park to retire sooner. If you can eke out just another couple of percentage points on your average return — boosting it to 11% — then that’ll cut another 3 1/2 years off your target.

4. Become a cheapskate.
So far, we’ve only looked at half of the story. How much you spend plays just as important a role in retirement as how much you save. And while many expenses go away when you stop working, new ones quickly take their place — things like travel, entertainment, hobbies, and medical care.

But you have a lot of control over many of these expenses. If it’s worth it to you to spend less in retirement, you won’t have to save as much before you retire. Cutting 10% off your spending means you’ll get to your smaller goal a year earlier.

All in all, combining these four simple tips can let you retire as much as a decade or more sooner than you otherwise would. That thought just might be enough to make even a bad day at work seem brighter.

Source: Fool.com

While you’ll hear some talking heads on TV tell you this is a “once-in-a-lifetime” event, the fact of the matter is that these returns resemble what we saw year-to-date around this time in 2002 … just six years ago. Take a look:

Despite all the talk of financial calamity, most of us are still ahead of where we were six years ago. That’s not good, of course, but it’s also not the end of the world. Incidentally, if you’ve owned Brazil and China for the long term, you’ve improved your lot in life quite a bit.

What this means for you
There are two lessons to take from these tables. The first is that the safest time to buy stocks is not when the market is optimistic, but when it’s extraordinarily pessimistic. That was the case in December 2002, and if you bought then, you got in at such low valuations that the current crisis — a crisis that has cost trillions in wealth, taken down several major investment banks, and garnered extra-large headlines around the world — has merely returned you to your original cost basis.

The second lesson is that it’s important to diversify globally, because different countries are driven by different forces and will offer different returns — and different valuations — over time.

That’s not to say we’re taking these events lightly here at The Motley Fool. Instead, our goal is to help more individual investors understand that this is not the time to run terrified into cash, but actually an attractive time to put money to work around the world.

The key, however, is to know your facts.

Source: Fool.com

I kicked myself for two years while the stock quadrupled. In the spring of ’94, I followed my instincts and became an AOL shareholder — in spite of an article in a major financial publication that declared AOL grossly overvalued and predicted that the stock would decline by 35%.

The following year, the stock dropped 25% or more three times. And then in 1996, shares absorbed a drop of 65%! Despite these setbacks, the company went on to wreak havoc on both the business and journalistic establishments en route to putting up some of the best returns available during a decade of great investment returns.

Even with all the temporary downturns, and even though the stock is today down from its all-time high, my initial investment has still increased about 19 times overall — $10,000 in stock at that time would now be worth $190,658, which amounts to an annualized return of more than 23%.

We’d all love to find the next AOL or Amazon.com (NYSE: AMZN) or whatever. That goes without saying.

But how can ordinary investors like you and me — a couple of regular Fools — find the next great company? It’s not impossible. If you can train your eyes to spot innovative companies breaking the rules in their industries, you increase your odds dramatically.

You can’t score if you don’t shoot
The Wise of Wall Street would chalk up AOL’s 23% annualized gains to luck. “No one can really identify the great companies of the next generation,” they’d say. Growth stocks are too risky; it’s best to avoid that style of investing altogether and let a Street “expert” manage your investments.

I disagree. Investing in great companies early in their high-growth stages and then holding them for the long term will provide the highest possible returns. Period.

We call those companies Rule Breakers. Our investment service of the same name seeks out the great growth stocks of tomorrow — the potential AOLs — before the Street catches on.

Think big, but keep an eye on the basics
Boiled down, I look for six signs of a potential Rule Breaker:

* Sign No. 1: Top dog and first mover in an important, emerging industry.

Top dogs are active, fast-moving market leaders. In 1994, AOL was a top dog. Some years earlier, Microsoft was a top dog before making its impressive run. First movers seize a temporary edge over the competition and then exploit that advantage. These companies come from emerging industries — for example, from biotechnology today or e-commerce a few years back — because it’s unlikely that the railroad or meat-packing industries have much room left to run.

Rule Breakers are not hidden; they are right before our eyes, and they bring a disruptive technology, clever and effective marketing, or a brand-new business model to this little backwater planet of ours. They rattle our capitalistic foundations.

* Sign No. 2: Sustainable advantage gained through business momentum, patent protection, visionary leadership, or inept competitors.

Can the company protect the advantage it obtained from its first-mover status? Apple, for example, absolutely dominated Microsoft and Sony (NYSE: SNE) in portable music players and now is trying to do the same thing with smartphones to Nokia (NYSE: NOK), Motorola (NYSE: MOT), Palm (Nasdaq: PALM), and Research In Motion.

* Sign No. 3: Strong past price appreciation.

Sometimes, the best investments appear overvalued. I bought AOL after it quadrupled. Was Tiger Woods unknown before he joined the professional tour and started winning majors? Was No. 23 unheralded when he joined the Chicago Bulls after his junior year at North Carolina?

* Sign No. 4: Good management and smart backing.

This is the most important attribute of all — and it might be the most difficult to get right. Few would disagree that visionary leaders are behind the greatest companies of our generation: Nike has Phil Knight, Microsoft had Bill Gates, and Google has Eric Schmidt, Sergey Brin, and Larry Page. Investors should also be prepared to learn about the venture-backers of a young company. If the very best venture capital firms are behind a company, maybe you should be, too.

* Sign No. 5: Strong consumer appeal.

Rule Breaking companies provide products or services that improve the quality of people’s lives. Microsoft, for example, made home computer use a reality.

* Sign No. 6: You must find documented proof that it is overvalued according to the financial media.

This is the easiest one of all to identify. Every day, the Wall Street pooh-bahs declare that this or that stock is overvalued. Google shares begin trading publicly, and the naysayers predict another tech “meltdown.” Even today, with the vast majority of stocks having taken huge hits, there are some companies with improving fundamentals that Wall Street is afraid to touch because they appear more expensive than others.

If a company’s growing earnings lead to an increasing valuation, someone somewhere will surely argue that the company is overvalued. The reason this is valuable is that it keeps people out of a stock. Later on, as the company proves out its position as a profitable, even dominant, leader, then the skeptics finally buy — which is what can give you serious appreciation as an early investor in Rule Breaker stocks!

Before they were blue chips
So there you have it. Those are the characteristics I look for in tomorrow’s landscape-changing companies.

It’s essential to our strategy to identify great companies early in their growth cycles. Then we hold for the long term. Indeed, many of the best examples of Rule Breakers are today’s blue-chip companies. You may recognize a few:

* Two years after the company went public.
** All prices adjusted for splits and dividends.

Each of these companies had the six signs of a Rule Breaker at one point in its growth cycle — and each posted fantastic returns as a result. There are other not-as-famous companies out there — hundreds of them — that once were poised for the limelight but now are forgotten. In most cases, the flameouts and the fakers significantly lacked one or more of the signs we pointed to above.

There is no trade-off
With detailed information on more than 9,000 publicly traded companies, the stock market can’t help being fairly efficient. But the market doesn’t have all the information, does it? Many people insist on following the rules laid down by Wall Street or by the latest “this is the way to invest” fad investment book, regardless of how banal or unsuccessful these prescribed rules behave in practice.

Source: Fool.com

#1 Take stock of your current financial situation and goals

This involves calculating your net worth (assets minus liabilities), knowing how much money you have for stocks after paying your expenses, and setting financial objectives to cover everything from a comfortable retirement to your children’s university education.

#2 Determine the approach you’ll take to investing

An investor’s stock picking style will largely depend on a person’s stage in life, Dagys says. For example, a recent university grad with a high-paying job may want to consider a more aggressive approach that relies on growth stocks, while an individual nearing retirement may want to choose more conservative stocks, such as banks, to help preserve capital. The underlying reason is the stock market has historically gone up over the long-term, but has also shown multi-year periods of up and down cycles.

#3 Know your risks

This means understanding the downsides from all the risks associated with a company. For example, the returns on an American stock will be affected by the exchange rate between Canadian and U.S. dollars. Irrational shareholders can push the price of stock into bubble territory, or an emerging technology could soon make a company’s product obsolete.

#4 Get the right information

Making informed investment decisions requires reading and understanding financial statements, Dagys says. But be aware that a company’s bad news can be buried in footnotes

In the first hour of trading, the Dow Jones industrial average rose 135.65, or 1.28 percent, to 10,745.31, but by the afternoon had dropped more than 100 points, before inching upward again.

The Fed’s move was aimed at boosting waning confidence that governments can stop the crisis from spinning out of control and at getting banks around the world to open their ever-tightening purse strings. Banks have been increasingly reluctant to lend to each other as distrust spread throughout the financial system.

As the market fluctuated, speculation swirled about the futures of such major players as thrift bank Washington Mutual Inc. and investment bank Morgan Stanley. Media reports have been saying that Wells Fargo & Co. and Citigroup Inc. are interested in a possible takeover of Washington Mutual, and that Morgan Stanley and Wachovia Corp. are in talks about a possible combination.

CBS News correspondent Jeff Glor reports investors Thursday morning have expressed lots of frustration here this over the so-called snowball effect on U.S. banks and wondering just when it will end.

Asian markets closed lower, but the Fed action helped send European stocks higher after three days of losses.

Worries that other financial companies could fail and further upend the economic system may cast a pall on the central banks’ step, which spread billions of dollars around the world in exchange for foreign currencies.

President George W. Bush, who canceled a Republican fundraising trip to Florida and Alabama to focus on the crisis, said the markets are adjusting to the “extraordinary measures” that have been taken in recent days.

“Our financial markets continue to deal with serious challenges,” Mr. Bush said in two minutes of remarks – his first on the turmoil since Monday. “As our recent actions demonstrate, my administration is focused on meeting these challenges.”

He did not specify what additional actions would be taken. The president was to meet with economic advisers over much of the day, and was seeing Treasury Secretary Henry Paulson at the White House later Thursday.

For more than a year, investors have watched with growing alarm as the U.S. economy, the world’s largest, has struggled to right itself before being tipped over the edge by massive foreclosures, shrinking consumer spending and rising inflation.

The turmoil has swallowed some of the most storied names on Wall Street. Three of its five major investment banks – Bear Stearns, Lehman Brothers and Merrill Lynch – have either gone out of business or been driven into the arms of another bank.

The two remaining – Goldman Sachs Group Inc. and Morgan Stanley – were under siege.

A sharp rise in borrowing costs has worsened. The total amount of commercial paper fell by $52.1 billion for the week that ended Wednesday, as banks cut back the short-term loans companies from small garment factories to General Electric Co. depend on for their daily operations. At the same time, the interest rate on those short-term loans more than doubled, with rates for seven-day paper jumping to 4.5 percent from 2.5 percent.

Russia closed its stock exchanges for a second day Thursday as President Dmitry Medvedev pledged a 500 billion ruble ($20 billion) injection into financial markets to stem a dizzying plummet in share prices – and quash fears of a repeat of the country’s 1998 financial collapse.

In a statement Thursday, the Fed said it had authorized the expansion of swap lines, or reciprocal currency arrangements, with the other central banks, including amounts up to $110 billion by the European Central Bank and up to $27 million by the Swiss National Bank.

The Fed also said new swap facilities had been authorized with the Bank of Japan for as much as $60 billion; $40 billion for the Bank of England and $10 billion for the Bank of Canada.

All told, Fed action increased lines of cash to central banks by $180 billion to $247 billion.

Shares of the largest U.S. thrift, Washington Mutual Inc., fell 13 percent amid reports that the government was trying to find a buyer for the bank, which has been battered by bad home loans. It lost $3.3 billion in the second quarter.

And, demand for super-safe Treasurys surged Wednesday, sending the yield on the 3-month Treasury bill briefly into negative territory for the first time since 1940, as investors rushed for the closest thing to cash.

After the government bailed out AIG and a money fund “broke the buck,” investors were worried about the risk of most assets.

It was the fourth consecutive day of extraordinary turmoil for the American financial system, beginning with news on Sunday that Lehman Brothers, would be forced to file for bankruptcy.

The 4 percent drop Wednesday in the Dow reflected the stock market’s first chance to digest the Fed’s decision to rescue AIG with an $85 billion taxpayer loan that effectively gives it a majority stake in the company. AIG is important because it has essentially become a primary source of insurance for the entire financial industry.

Mortgage rates, which had fallen after the U.S. government’s takeover of mortgage giants Fannie Mae and Freddie Mac, rose again, removing a glimmer of hope that the housing crisis, the kindling for the broader financial meltdown, was hitting bottom.

And new statistics showed that construction of new homes and apartments fell a surprising 6.2 percent in August to the weakest pace in 17 years.

The Treasury Department, for the first time in its history, said it would begin selling bonds for the Federal Reserve in an effort to help the central bank deal with its unprecedented borrowing needs.

Treasury officials said the action did not mean that the Fed was running short of cash, but simply was a way for the government to better manage its financing needs.

Separately, the Securities and Exchange Commission tightened rules on short selling, the practice of betting that a stock will fall.

A $62 billion money market fund – Primary Fund from Reserve – on Tuesday saw its holdings fall below its total deposits, a condition known as “breaking the buck” that hasn’t happened to a money market fund since 1994, Rosenberg said. Money market funds are supposed to be conservatively invested and almost as safe as cash.

Withdrawals from money market funds have become one factor in the global tightening of credit, as investors and banks hoard their cash.

Source: cbs.com