Thursday, May 22, 2008

The Fed’s Rate Cuts May Not Affect Mortgage Rates

Federal interest rates are not directly tied to mortgage markets, therefore have no direct affect on mortgage interest rates. This seems to be one of the biggest misconceptions in the mortgage industry. When the Fed raises or lowers interest rates, the interest rate you are quoted from your lender or mortgage broker may not coincide with this rate.

The main driver of mortgage interest rates are the bond market, more specifically Mortgage Backed Securities. When the demand is high for these bonds, interest rates go up; conversely when the demand is low and the supply is high, the interest rate on a new mortgage will decrease in order to stimulate demand. This is an oversimplification of mortgage rates, but it should help to disseminate the myth that the mortgage market will follow the ups and downs when the Fed changes the rate. Here is an article that discusses this topic in greater detail (

If you are in the market for a refinance in the coming year (2008 into 2009), you probably should not wait to do so. If you have 30% or less equity in your house right now and you need to refinance for any reason (especially if you are in an ARM), you will want to act quickly because at least 50% of applicants in today's mortgage market are running into issues when they have an appraisal done on their property. They find rather suddenly that they have lost as much as 20% (sometimes more) of their equity due to the down real estate market and increasing foreclosures occurring nationwide. The simple fact is that if one of your neighbors fall into foreclosure tomorrow, you may not be able to refinance out of your ARM (Adjustable Rate Mortgage) because you now owe more than your house is worth. This is happening more often then most people realize.

You could go to websites like Zillow ( or Cyberhomes ( to get an idea of the current value in your area. These websites are not exact, and occasionally they can be pretty far off if the property is not considered to be the norm for the area. However, they are a valuable tool to use to get an estimate based on comparable properties in the area. They also show the moving average for home prices and the amount that your property has increased or decreased in the previous two months, seven months, and one year intervals, and since the last sale. Additionally, you could contact an appraiser or Realtor in your area to find out what affects if any, foreclosures are having on your particular real estate market. Realtors and appraiser will usually provide this information free of charge, if you are just looking for general information.

If you are looking for them to name an exact figure for your property, you will need to pay for an appraisal which usually runs between $300-400. If you have no immediate need to refinance, now might still be a good time because interest rates are at six year lows and are not predicted to go below 5.5% par again (30 year fixed rate) for some time. Contact your mortgage lender or broker for details on the current rates, as these rates change daily and have proven somewhat volatile in recent times. This article is simply a word of caution in today's current real estate market. The coming years will probably balance out, and real estate will begin to increase in value again. For the time being it is suggested that you use caution and move quickly if your current equity raises concern for whether or not you will be able to refinance.

Sunday, April 27, 2008

Stock Market Simulation Games

A stock market simulation game is a great way to practice your investment skills before actually investing any "real" money in the stock market.

Simulation games are usually played on the internet, where people can experience the thrill of investing in the stock market without any risks, costs or any fear of losing money when and if they make a poor investment decision.

Many teachers and professors of banking and finance are now using stock market simulation games to teach their students about the rudiments of investing in stocks. Most stock market simulation games come with a fee to get started, but there are some that are free of any charge. One does not need have prior knowledge about the stock market to join.

This is how stock market simulation games usually work:

First, players must register. After registration, players are given an initial sum of "virtual" money to invest in companies of their choice. Players build a portfolio of stocks by buying and selling shares in companies. Most stock market simulation games use real-time market data.

The objective of most stock market simulation games is simple:

To increase the value of your portfolio of stocks so that it is greater than that of the other game players.

Below are some tips on choosing a stock market simulation game:

• Choose a stock market simulation game that is used and recommended by reputable colleges, high schools, middle school, investment clubs, brokers in training, corporate education courses and any other group of individuals studying markets in the U.S. and worldwide.

• Choose a stock market simulation game that is comprehensive and easy to implement in any Finance, Economics, or Investments class. A good stock market simulation game should feature trading of stocks, options, futures, mutual funds, bonds from the U.S. and many of the world's major markets.

• Choose a stock market simulation game that provides a valuable, reliable, and realistic trading simulation at a reasonable price to members and other individuals who are interested in learning more about investing and trading. The simulation game should also have some capability for testing a variety for investment strategies.

• Choose a stock market simulation game that has a toll-free customer service phone number and excellent e-mail support for members. The support function should be able to quickly answer any questions that members/players may have.

• Choose a stock market simulation game that is easy to use and easy to teach even to those who have never had any real hands-on investment experience.

Tuesday, January 1, 2008

Wise Stock Investing is about Much More than Being "Right"

The title may sound strange to some investors or traders, especially to those that are new to the subject. Some people are convinced that this is the single most important thing for success in the stock market. But the truth is; when it comes to being a successful investor, how much money you make when you're right really isn't all that counts. The simple fact is you won't always be right. Oops. Bad news, right. It's not something you like to hear, but it's true. Isn't it? Even though it's possible that some of you may have met someone, at one time or another, that claimed to be right almost 100% of the time. And if you haven't met that person yet, you might run into him or her somewhere in the future. When you do, be careful. When someone tells you he or she is always right, in general, three scenario's are possible:

- You're talking to the world's best investor / trader
- You're talking to a textbook example of beginners luck
- You're talking to a liar

Let's take a quick look at all these possibilities. The first scenario is of course highly unlikely. Fortunately it's easy to find out if this is the case. Just take a look at the person's track record. People that like to brag about being right all the time, usually enjoy making their point. So they would love to prove their track record to you. If they fail to cough one up, they're probably not telling you the truth.

The second scenario is a lot more likely. Only a couple of years ago, when every idiot could make a profit because share prices were continuously on the rise, it seemed like these people grew on trees. In todays market you won't find a lot of those people hanging around. Most of them got more than they could handle when the bubble burst. And many of them never had the courage, or the financial means, to return to the game of investing.

Then of course we have the third and most likely scenario. In this case, you would take the same approach as you did with the super investor. You ask them to show you their track record. The liar of course will never give you this. Instead they will try to convince you with wonderful stories. All of which are probably fascinating. Some would be interesting enough to serve as a plot for a Hollywood blockbuster on Wallstreet. However, none of these stories will do you any good when it comes to making it in the stock market.

The plain and simple truth is that nobody can invest for any period of time and be right each and every time. It simply is not possible. Now that doesn't mean that anyone telling you they never lose is lying. It depends on what they're really saying. They are not saying that they never lose on a trade or on a specific investment. What they may be saying is that they never close out a year with a loss at the end. So how come they can make money every year even when they lose on some trades just like everybody else? The answer is simple; they are right more often then they are wrong. And more importantly, when they are wrong they limit their losses.

To illustrate this, let's compare the stock market to a game of roulette. Some people could easily substitute one for the other. They live under the assumption that both are simply games of chance. Others may find this comparison ridiculous because the two are so vastly different. The two camps would probably never agree, so let's not go into that discussion here. However there is something very important we can learn from roulette.

In a game of roulette the odds are actually divided in a reasonably fair way. If you were to continue playing by constantly just betting a small amount, say $10.00. And you would consistently play the same color, say black. You would be right 18 out of 37 times on average. Of course you would also be wrong 18 times. If you would consistently play the game this way, you would probably never win much, but you couldn't lose much either. As a matter of fact if you would just continue playing long enough, you would eventually lose on 1/37th of all your bets.

Unfortunately the same can not be said for the stock market. The odds are quite different there. Yes, the market can go up and down, and there is no zero, but there are many more factors to be taken into account than in a game of roulette. The same strategy that was described in the roulette example could work quite well in the stock market, but it could also cost you everything you've got. One part about being a successful trader is to be right as often as possible. And even though you cannot predict the market, at least not perfectly. You can do your homework by studying the technical analysis charts and doing some fundamental analysis into the company. If you know what to look for, this will greatly increase your chances of being right.

However, you still will not be right all the time. And that is where both the lesson from the roulette example and the title of this article come in. First of all, you have to place your 'bets' evenly. Stick to the $10.00 example. Don't be persuaded to invest a significantly large part of your investment capital into any one trade just because you're so sure this time. This may work out fine many times, but sooner or later it will hurt you, and it will hurt bad. You see it is not how much you make when you're right that counts. It is what you keep yourself from losing when you're wrong that really matters in the long run. You can be right 90% of the time and make some pretty good money. But it won't do you any good if you lose it all on the 10% of your trades when you're wrong. Of course diversification and proper asset allocation can help protect you, but that simply isn't enough. You have to know when to get out.

So next time when you're about to make a trade, ask yourself: "What if I'm wrong". And then determine a price level at which you will take your loss and get out. Once you've determined this simple rule, just stick to it. It may cause you to lose a little money every once and a while. Even on trades that may bounce back just one day later. But in the long run that will hurt far less than the losing trade you so desperately hang on to, hoping it will recover. Only to find out that it won't.

Earnings Per Share May Be Dangerous To Your Financial Health

There's a serious and completely preventable problem occurring in the financial investing arena these days.

This threat to one's financial well-being comes from the sole focus on "earnings per share" triumphantly trumpeted by companies in their quarterly financial press releases. And the financial media doesn't help any with their superficial thirty second blurbs informing the investing public of the same thing. Even more alarming is that this novice mistake is frequently made by "expert" and "veteran" investors, as well.

The unfortunate truth is, failure to address this common oversight can cause painful repercussions to your investing portfolio. And also hinder you from identifying companies worthy of your long-term financial best interests.

What is this critical investing component? It's the Cash Flow Statement, kin to the more popular balance sheet and income statement. How does the free cash flow statement help you with your investing oversight? A company's free cash flow helps to answer three very fundamental questions - When to buy? When to sell? And at what prices?

The fact is, free cash flow is what should be monitored first and foremost as a shareholder in any business. Most everyone knows that "cash is king". Free cash flow is the lifeblood of any company.

The problem when paying sole attention to "earnings per share" is that it is formulated using "generally accepted accounting principles". Commonly known as "GAAP", this accounting methodology is a flexible representation of the company's revenues and expenses, mainly formulated for tax reporting purposes. The sticking point is that "GAAP" consists of many non-cash items - sometimes considered as "accounting fictions". And because of the permissible leeway in how GAAP can be implemented, it's subject to manipulation.

In contrast, the cash flow statement is less prone to being manipulated than the other two financial statements. That's because it mainly boils down to what money came in and what money went out. Not unlike an individual's monthly budget.

When analyzing a company it's critical to understand how much cash flow it is earning from its operations. This amount represents the excess cash that can be taken out of the company to be used for dividend payments, share buy-backs, new investments and acquisitions; all activities geared to the benefit of shareholders.

With GAAP earnings on the other hand, companies often take significant "one-time" charges against current earnings, usually after some adverse event, like a company acquisition gone bad. As a result, future earnings are then susceptible to being inflated artificially.
The income statement also includes many non-cash allocations and accounting conventions that don't reflect a company's true cash position.

A further example of an ongoing non-cash "cost" is depreciation and amortization, which can add up to significant amounts. In reality, the cash has already been spent for these assets. GAAP adjusts these one-time payments over a period of years to smooth out the companies earnings over time so they don't appear too lumpy or erratic.

Another flaw might be using the balance sheet for liquidity analysis because the data represents only a specific period in time. By contrast, liquidity analysis derived from the cash flow statement can be used to provide a more dynamic picture of what cash resources are available, and can be evaluated over a chosen period.

One can also see whether cash spend is at levels that the company is going have to incur debt, slow its spending rate, or both. This is especially important for new companies that are not generating profits yet. Do they have enough cash to remain in business?

Changes in cash flow can be reveal much about a company's accounting practices, too. Cases where cash flow is not rising, or declining, as fast as earnings may warn of possible accounting shenanigans.

These are just a few of the many insights and potential advantages that analyzing the cash flow statement will bring forth. And it's freely accessible at the Security and Exchange Commission's EDGAR financial statements web site.