Corporate Secrets from Generation X to Generation Y

So you’ve completed college and started your first job.  You probably started out enjoying things, but soon became frustrated by the various rules and policies that you found.  You can’t understand why you need to come in at a certain time instead of having a schedule that you can adjust around your life.  You submit ideas for improving things, but just have them rejected.  You honestly want to make things better, but no one seems to be listening to you.

Here are a few things to consider and that may not make you feel better, but at least give you some insights you may not have considered:

1)  The primary purpose of any business is to make money for the owners.  It is not to give people jobs.  It is not to save the environment or promote some social agenda.  This is not evil but fundamentally good.  The more money a company makes the better job it is doing meeting the needs of its customers, and meeting people’s needs is a noble thing to do even if you are financially rewarded for doing so.  (It is true that there are some companies that make money through deceit and dishonest practices, but they don’t tend to last long).

Jobs are a byproduct of the business and most business owners would choose to do everything themselves if they could since, quite frankly, having employees is a hassle.  Think of all of the time spent doing payroll, filling out forms for the IRS, and learning and complying with the various regulations that employers must do.  Add on top of this dealing with the various personalities, and suddenly you wonder why anyone hires anyone else at all.

Unless a person at a job enables the company to make more money than they cost in salary, benefits, and infrastructure there is no reason to keep them employed.  If you demand more than you provide, such that the company does not make enough from your work to cover the expense of having you on the payroll, you will eventually be let go, either through a layoff or when the company shuts down.  (I wonder if the rise of unions and the hassle with dealing with the various work rules that resulted is a big reason a lot of manufacturing went overseas.  With all of the cost of shipping, dealing with foreign governments and cultural differences, it is not like it is something companies would do on a whim.  Maybe with a few concessions and a reduction in some of the truly destructive work rules, more factory jobs would return.)

2.  If you want to make more money or otherwise move up in a company, you need to be more valuable to the company.  This means that your actions and the products you produce must make more money for the company.  This means figuring out the needs of the company and meeting those.  The more money the company makes, the more they can pay you and the more perks they can provide.  If you do make a lot more money for the company and are not rewarded appropriately, you should look elsewhere for employment – that is your choice.

3.  There are usually good reasons for the way things are done.  It is not always just because “it has always been done that way.”  Realize that having a successful business does not just come through luck.  It is very competitive, causing things to be done a certain way out of necessity, and many of the practices and processes in place are due to the evolution of the company.

Take the time to talk with some of the higher-ups in the company and ask why processes you object to are done as they are.  Not in an adversarial, gripe-session way, but in a respectful way that shows genuine curiosity.  You will probably find that 1) people in the management chain have very high charisma and conversational skills, since this is a critical skill for management.  2) For many of the processes you despise, there are very good reasons for them.  Unless you really understand the reasoning behind the decisions, you really can’t make good suggestions for improvements.

If you take the time to gather information, you will both have a better understanding of how a company is run and why they make the decisions they make.  You will also get exposure with your management chain (good exposure if you are respectful and genuinely curious).  You will also start to be known as a person with ideas and with an interest in how the company functions.  This may result in you being involved when such policies are reviewed and changed.

4.  A large peeve I’ve heard from Gen y’ers is that they would like a flexible schedule and/or the ability to telecommute.  Realize again that the purpose of the business is to make money for the owners (see point one).  There are a lot of good reasons to have people together and all on the same schedule.  If you work in a job that requires interfacing with customers, obviously you need to be there when the customers are.  Even if you don’t interface with customers, most jobs require a lot of interaction with coworkers.  While it might be better for your schedule to work from noon until 8:30 PM, or from 5 AM until 1:30, there may be people who need to ask you a question or have you involved in a meeting and if you are not around, it makes it more difficult.

Telecommuting means that you are almost never available for face-to-face discussions, which are extremely valuable for a business.  Remember that businesses pay thousands of dollars for people to travel and meet for a few hours, so obviously face time is important.  There can be some jobs that you really can do with little interaction, but for many this is not the case.  Realize also that if people don’t see you, you are easy to forget.  It also makes it easier to eliminate you if you are not normally around since even if you are doing a great job, at some level in your coworkers’ minds you are already part way out the door.

5.  Keep your passion.  While all of your suggestions will not be taken, don’t give up the fight to change things for the better.  Rather than expecting things to change because you suggest that they should, however, realize that it may require you to work your way up in the company and make the changes.  There are also things that you may not be able to change universally, but you can change them at your level.  Think that the company should offer more training?  Consider budgeting more training for projects you lead.  Think that meetings are a waste of time?  Consider implementing other communication methods for your projects.

Also, a coworker of mine was fond of saying that “Science progresses one funeral at a time.”  The same is true with corporate policy.  Realize that things may not change overnight, but you can have your chance in the future.

6.  Finally, expand your information outside of your social contacts.  With the advent of Facebook, Twitter, and blogs, it is easy to start to believe that you have all of the answers, and that things would be so much better if people would just listen to you.  Realize that people have been working on ideas for thousands of years, and it is mostly the good ideas that have remained.  A wise person realizes how little they know and is always striving to learn more.  Read some of the great books (they’re great for a reason.)  Talk to people outside of your circle of friends, especially if they don’t share your viewpoints, and listen and process what they have to say.  Some of the time it may strengthen your viewpoints.  Other times you may reject what you read or hear.  Unless you are exposed to new ideas and learn from the past, however, you will never grow.

Please contact me via vtsioriginal@yahoo.com or leave a comment.

Follow me on Twitter to get news about new articles and find out what I’m investing in.  @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Picture Credits: Sanja Gjenero, downloaded from stock.xchng

What PE Ratio Range Should be Used When Buying Stocks?

(Reader’s note – the PE, or Price Earnings ratio, is the price of a stock divided by its earnings per share.  It is a widely used measure to determine how expensive a stock is when compared to its peers or the market.)

There are two camps of investors – Value Investors and Momentum Investors.  Value investors look for stocks that are underpriced, buy them until they are overpriced, and then sell.  Momentum investors find stocks that are going up, buy them, and then sell them when they start to slow their ascent.  Value Investors buy low and sell high.  Momentum investors buy high and sell higher.

With a PE of 90, that stock would certainly not be of interest to Value investors.  It is really high in price.  The average PE for US stocks is typically around 15, although it varies by industry.  Value investors would be looking for PEs of around 10 or less.

It might be of interest to momentum investors, but even for them, a PE of 90 is pretty rich.  If you are buying based on the greater idiot theory (figuring you paid too much but you can sell it to someone for more), obviously when the price gets to a certain point you start to wonder if you’ll end up being the greatest idiot.

Unless the earnings are expected to jump way up and justify the price (like earnings are expected to double or triple), I wouldn’t touch the stock.  You are likely to see a decline, or at least see it sit in the same price range for years while earnings try to catch up to the lofty price.  Some of the great growth stocks do have PE’s in the 30′s of even 40′s, however.  For example, Home Depot regularly had a PE in the 30s while it was still a hot growth stock.  It’s rate of earnings growth justified a high PE.  It was an industry leader.

I can see few stocks justifying a PE of 90, however.  I would put my money somewhere else for now and watch your stock to see if it becomes more reasonably priced.

Follow me on Twitter to get news about new articles and find out what I’m investing in.  @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Reducing Your Taxes for 2011

There are only a few days left in 2011.  The new year starts on Sunday.  If you have not done so already, this is the time to make the financial moves to save money on your taxes.  By next week, it will be too late for 2011.

Note:  As the disclaimer for this blog shows, I’m not a CPA.  Tax laws are very complicated and change frequently (even the IRS gets them wrong from time-to-time.)  You therefore should consult a CPA to verify the rules before you make a costly mistake.  The following are just things I’ve learned from experience in managing a portfolio.

The basic rule for tax planning is to delay gains and pull losses forward.  This means that it is generally better to get all of the deductions and take all of the losses you can in the current year and delay making gains until next year (or longer than that if you can).  This is not true if, for example, your income is going to double next year so you will be in a higher tax bracket, but it is a good general rule for most people.

Based on this philosophy, here are some things to do this week:

1.  Scour your portfolio for losing positions.  If you feel that the underlying fundamentals of the company have changed such that it is time to sell anyway, do so this week so that you can bank the loss in 2011.  If you also have gains in stocks and the positions have become so large that you would like to trim them back, you can sell some shares at a gain and directly offset your gains with your losses.  You can also offset about $3000 worth of other income and carry the losses forward to offset income in other years if your losses exceed this amount.  Again, check with a CPA on the specifics since this can get very tricky.

2.  Make sure you have fully funded your children’s college accounts.  This may not reduce your taxes now, but it increases the amount of money you will have to withdraw tax-free when your kids are ready to go to college.

3.  Make last-minute contributions to IRAs and Roth IRAs (you actually have until April to make these contributions, but why not get them out-of-the-way early to make sure you don’t forget or do something else with the money).

4.  If you have a losing position but would like to keep the shares (you feel the company has good long-term prospects even though the price has been beaten down) you might consider selling the shares for the loss and then buying them back later.  Note that you must wait at least 30 days before buying them back or you will have a wash sale and not be able to deduct the loss.  Note that you also can’t buy additional shares now and then sell the shares for the loss – you also have to wait 30 days after you bought the shares.

The issue with selling shares in a stock you like is that the company may take off after you sell before you are able to buy in again. You also might buy something else with the money while you are waiting and never get back into the company again. If there is another company in t e same industry that you also like, consider buying it with the proceeds of the sale. For example, if you own shares of Coke at a loss, you might sell them and buy Pepsi.

5.  The wash sale rule does not apply if you are selling your shares at a gain (you can always take a gain and rebuy the shares whenever you wish).  If you have a stock that has a large gain you might consider selling some shares and taking part of your gain now to split up the gain over different years.  Assuming you have held the shares long enough to have a long-term gain the taxes are fairly low currently.  If you still like the stock, buy it back immediately to avoid missing the future success of the company.

Note that you might delay selling the shares until next week to delay the gain into next year, but then again tax laws may change next year.  Some of these laws apply retroactively to snag profits made early in the year.

6.  Pay your property taxes on your home before the end of the year to bring the deduction into 2011.

7.  If you have shares in a stock that has gone way up and you are now afraid it may fall, consider selling short-against-the-box.  In this strategy you short the same number of shares you would like to sell and then allow the shares to wash out after the new year.  This will lock in your profit (but you will also lose the ability to profit further if the shares rise).

8.  Another strategy if you have a stock that has gone up a lot is to buy a January put option.  This will give you the right  to sell the shares at a predetermined price between now and mid January. This will lock in your profit but still allow you to participate, should the shares rally further.  Typically such put options (assuming you buy one just below the current price of the stock) cost between $100 and $200 per hundred shares.

Take some time now to save money on your taxes in April.

Please send investment questions to vtsioriginal@yahoo.com or leave them in a comment.

Follow me on Twitter to get news about new articles and find out what I’m investing in.  @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Choosing Stocks for a 401k

Investing in stocks in a 401K is actually quite simple.  The reason is that, unlike a traditional brokerage account where your investment options are nearly limitless, your choices of investments are usually fairly limited in your 401k.  The secret is simply to create an account with as much diversification as you can and then maintain that diversification.

Step 1: Selecting a Contribution Amount

When you start working Human Resources will send you a form, along with all of the packet of other forms, on which you specify your 401K contributions.  Typically one defines a percentage of your pay to put away each month. 

You should be contributing about 15% of your pay to retirement.  This will allow you to save enough to replace your income in retirement without depleting your resources.  Using the different accounts available, here is how you should allocate that 15%:

1.  Fund your 401K up to the amount that the company matches.

2.  Fund an individual IRA up to the limit.

3.  If you have money left over, fund your 401K up to the limit.

4.  If you still have money remaining (lucky you) fund a private investment account.

Step 2:  Selecting Initial Investments

In contributing to your account, you typically specify the percentages of your contributions which go to each fund each month.  You can also periodically redistribute the funds you have built up among the different funds.  You should spread your contributions out to different investment types.  This provides stability, since one sector of the market will typically do well when others are doing bad.  The types of funds available will vary, but something like the following should be used:

20% Large Cap Stocks

20% Mid Cap Stocks

20% Small Cap Stocks

10% Aggressive Growth

20% Bonds, or a growth and income fund

10% International

Another asset allocation would be by the fund’s investment strategy instead of by company size.  An allocation in this scenario might look like this:

10% Aggressive Growth

25% Growth

25% Value

20% Growth and Income

20% International

Note that if there are more than one choice of funds in each category, choose the fund types that charge the lowest fees.  Index funds or Index ETFs are ideal for their low fees.  Looking at fund return history may seem like a good strategy, but funds rarely repeat past performance. By buying a fund that has done well you are actually increasing your chances of buying a basket of stocks that are high in price.

Step 3:  Rebalancing

During any span of time some funds will do better than others.  For this reason, about once a year, you should rebalance your portfolio. 

In doing this, exchange securities until your assets are allocated again according to your strategy.  This means you will be selling shares of funds that have done well and buying shares of funds that have done poorly.  You are therefore selling high, locking in profits, and buying low while the funds are at a  discount.  Often your 401K plan will allow you to simply specify the percentages you will have in each fund and the needed sales and purchases will be done automatically.

For example, if you originally setup your portfolio as specified in the first example above and large caps have a great year compared to small caps, your allocations may look like this after the first year:

Large Caps: 30%

Mid Caps 18%

Small Caps: 15%

Aggressive Growth 12%

International: 8%

Growth and Income: 17%

You would reallocate until your allocations matched your original plan.

Step 4: Unwinding

As time passes you should start to unwind your account, generating cash and moving more assets into income producing funds.  In particular, when you are about 10 years from retirement you should start raising cash in your 401K. 

You should have 5-10 year’s worth of cash when you retire, so the first step is figuring out how much you will need to pay expenses including food, utilities, hobbies, travel, and medical expenses in retirement.   You should perhaps move between 1/2 and 1 year’s worth of expenses from your portfolio into a money market fund in your 401K each year.

Note it also makes sense to pay off any remaining debts you have when you enter retirement.  The security of having ownership of your house and a lack of car payments are well worth the expense.  Ideally you should save and pay these debts off quickly using your working income, but as a last resort using 401K money to retire these debts might be advisable.  Just remember that you will be paying taxes on the distributions, so plan distributions carefully with your CPA.

If you have a significant amount of money in your 401K, which you will have if you started early, you will be able to get by with less cash since you’ll have enough cushion in your account to handle market swings.  In this case you will want to shift a good portion of your assets into interest paying funds (bond funds, utility funds, etc….)  Ideally you will set up the account such that the dividends and interest you receive each year will exceed your living expenses. 

In this way, as long as the funds continue to pay the needed interest rates, you will be able to meet living expenses without needing to sell shares.  The price fluctuations of the shares will become immaterial at that point. Some buffer of cash should be kept even in this case, however, just as added protection in case unexpected expenses occur.

Managing your 401K is really not the daunting task it seems to be.  The keys are diversification and periodic reallocation.

Please send investment questions to vtsioriginal@yahoo.com or leave them in a comment.

Follow me on Twitter to get news about new articles and find out what I’m investing in.  @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Death Debt Collectors – Where have Ethics and Common Decency Gone?

This week in the Wall Street Journal the practice of “death debt collecting” was described.  (Read the whole Wall Street Journal article here.)  The practice is so vile that companies such as Bank of America use outside companies to do the dirty work so that their hands stay clean.

The way these companies work is as follows:  The companies find people who have recently died and who have outstanding debt.  In some cases they may be contacted by a bank or credit card firm to whom money is owed.  In some cases, they comb through obituaries.

These companies then call up the family and friends of the deceased, often right in the middle of the mourning period when emotions are fresh and people aren’t thinking straight.  Some of them tell the truth – that the people they are contacting are not obligated to pay the debt.  Other times they don’t mention this fact and try to trick people into thinking they are liable. 

They then use ploys like talking about preserving the deceased’s good name, act like they are there to help while trying to get the family and friends to pay the debt, and use other tactics to try to get people who do not owe the money to pay the debt.

Just as with a standard debt collection, they may call hundreds of times a week.  Their goal is to cause people to get emotional and do irrational things like hand over life insurance benefits despite needing that money for food and shelter after a breadwinner is gone.  These people are absolutely despicable.

Know your rights.  If a person owes a debt, that debt must be paid from their estate before funds are distributed to hiers.  It there are not sufficient assets in the estate to cover the debts, however, unless someone else is a co-signer on the account or loan they are not responsible for the debt.  Bottom line – if you did not sign for the loan you are not responsible and don’t let anyone tell you that you are.

Luckily, there is a law that offers some protection called the Fair Debt Collection Practices Act.  Under this law you can request that the collector prove that you owe the debt.  You can also request that the collector cease all communications with you.  If they continue to call or harass you after you have asked them not to, you then have recourse to sue them.  I hope you do. 

With a properly allocated portfolio, you can live a worry free retirement.

Please send investment questions to vtsioriginal@yahoo.com or leave them in a comment.

Follow me on Twitter to get news about new articles and find out what I’m investing in.  @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.