It’s nearly impossible to watch TV for more than an hour without coming across at least one commercial from a gold dealer. But even if you’ve already decided to invest in gold and want to get your hands on the physical asset, the loudest gold proponents won’t necessarily give you the best deal.

The explosion of exchange-traded funds that hold gold, such as SPDR Gold Shares and iShares Gold Trust, has made owning gold, at least on paper, cheaper and easier. In the last year, its price per ounce has shot up nearly 25% to $1,735. More than 44% of gold purchased in this year’s third quarter was for investment purposes, according to the World Gold Council, an industry association representing 22 gold miners—up from 39% in 2009 and less than 10% in 2001.

But for a certain subset of investors, nothing beats owning the actual metal.

People Are ‘Scared’

“People buy [physical] gold because they’re scared,” says David Ader, head of government bond strategy at CRT Capital Group, an institutional brokerage in Stamford, Conn. “If you own the physical gold, you can look at it and go, ‘Well, I can always buy a can of something with this.’”

Investors who have reached the point of wanting to own physical gold probably will want to have it easily accessible if an emergency strikes. So most should keep it in a safe at home that’s bolted to ground, says Bert Whitehead, a financial adviser in Franklin, Mich.

With the rise in gold prices, advertisements for gold salesmen have multiplied, and regulators are worried that some consumers might be taken advantage of.

The city attorney for Santa Monica, Calif., recently accused prolific advertiser Goldline International and some of its executives of using high-pressure sales tactics to sell collectible coins to unwitting consumers at huge markups. A Goldline spokesman referred to a statement made by the company last month that said the attorney’s complaint is without merit.

However that case plays out, it pays to be wary.

First, be clear on what, exactly, you want to purchase. Most gold investors seek exposure to the actual metal and care less about the collectible value of “rare” gold coins that might be pushed by some gold dealers, says Mr. Ader.

In that case, you will want to target gold that carries the cheapest price per troy ounce, whether it’s in the form of a coin or a gold bar. Bars will typically be the cheapest, he says.

Looking for a gold dealer? Steer clear of ones who advertise on TV or radio, says Donald Dempsey, a financial planner in Williston, Vt. “As a general statement, with all the ones you hear advertised on talk shows, you pay an extra premium,” he says.

Charging a Premium

Instead, he suggests getting recommendations from a financial planner. Alternatively, the World Gold Council has a listing of dealers on its website. The site also shows the spot price of gold. Gold dealers typically charge a premium of 2% to 5% for gold bullion and extra if you want to pay with a credit card rather than cash or a wire transfer, says Mr. Dempsey.

You should check prices with at least three gold dealers before buying to make sure you’re getting the best deal, says Mr. Whitehead.

Also, check the price at which the company would buy your gold back if you need to sell, says Chris Wills, a senior wealth adviser at R.W. Roge, a wealth-management firm in Bohemia, N.Y. Dealers will usually pay more for gold they originally sold, since they can more easily verify its authenticity, he says.

But most investors should buy physical gold only if they’re not planning to sell except in an emergency, he says, since the trading costs of frequently buying and selling are high.

Article source: Wall Street Journal

 

If you are a gold investor, you’re probably quite pleased with yourself right now. It’s been one of the best-performing investments this year.

Indian stocks are down 16.5% so far, bonds have been middling, with 7% to 10% returns but gold – that’s been stellar with its 22% gain over the last year.

A customer tried gold bangles inside a jewelry showroom at Noida in the northern Indian state of Uttar Pradesh in this April 21, 2011 file photo.

So, today being Dhanteras, an auspicious day to buy gold, perhaps you won’t think twice about investing in the yellow metal. But you should.

Will gold continue to gain value from these high levels? Yes, said Bollywood actress Hema Malini recently. She said that the recent price gains are clear evidence of why it will continue to be a good investment.

Ms. Malini aptly summed up how thousands of gold-lovers – who don’t actively follow gold demand or supply markets or euro-zone crises — think.

The argument that price will go up simply because it has risen in the past is not exactly a logical investment case. But science can explain this thesis.

Many of today’s gold lovers are inflicted with what psychologists call the “recency” effect – the tendency of human beings to give most importance to what has happened in the recent past.

We experience this every day.

Think back to your last work performance review. Most likely, it was determined by what you did or didn’t do in the few weeks or months before the review date.

If you had to decide whether to watch a new movie, you’ll likely base your decision on the last couple of movies made by that movie’s director or actors. You won’t seek out all the movies made by the director in the last 10 years to make the most rational assessment.

These are examples of how our current behavior is often driven largely by a handful of recent experiences, as opposed to an average of experiences over a long period of time.

It won’t hurt you too much if you pick a bad movie to watch but recency bias can have harmful consequences when investing your money. This is what propels individuals toward “hot” investments, often after they have reached their peak.

“The average person buys more aggressively in response to recent price rises,” said Terrance Odean, a finance professor at the University of California Berkley, in the neuro-science book, “Your Money Your Brain.”

Mr. Odean, who has studied 3 million stock trades by 75,000 American households, added that it’s not just yesterday’s boom that spurs buyers. “What makes people buy is a combination of very recent rises and any longer-term ‘trend’ of rising prices that they might perceive,” said Mr. Odean.

This “trend” is basically a few instances we put together in our minds to create a pattern.

Coming back to gold, for instance, my mother will argue that gold’s price has gone up over the long term. It was at around 330 rupees ($7) per 10 grams in 1973 and was recently trading at 26,300 rupees ($530) per 10 grams more recently.

This long-term trend is at best a fallacy. Prices of everything have gone up over the last four decades. Even milk – as per my mother’s recollection – has gone up by as much or more!

The fact is, when adjusted for inflation, gold is more than 30% below its price in 1980.

Still, we get carried away with its recent performance.

Money managers and fund companies are well aware of this recency bias and use it to sell us their products.

They’ve been launching several gold-investment funds this year, which aim to provide the return of gold without having to own physical gold. HDFC Asset Management Company introduced such a fund earlier this month, and last week IDBI Asset Management Ltd. launched its offering.

If gold is a good investment today at $1,612 an ounce, then it was an awesome investment in 2007 when it cost just $750 an ounce, right?

Yet, more than two-thirds of the 18 gold-oriented mutual funds that are available in India today were launched after 2010. Why didn’t we see a rush of gold funds in 2007?

Because at that time fund companies were busy launching stock funds when — you guessed it — stocks were booming. The Sensex gained 50% in 2007.

Investors who joined the stocks bandwagon then because of recent price gains, were in for a rude shock. In 2008, the Sensex lost more than half of its value.

So-called investment experts are not much better at getting away from this recency bias. Numerous stock market pundits today will advise you to buy stocks of fast-moving consumer goods, like toothpaste-maker Colgate-Palmolive (India) Ltd. and food products company Nestle India Ltd., which as a group have gained nearly 9% over the last year.

But if you want to make money, don’t you want to buy something cheap which you can sell for a higher price later?

Even if you are not a stock investor and haven’t been hurt in recent stock market crashes, it doesn’t hurt to learn from other people’s mistakes. Your brain is wired pretty much the same way.

Think about that before you decide to buy gold as an investment this Dhanteras.

Write to Shefali Anand at shefali.anand@wsj.com

Article source: Wall Street Journal

 

On Wall Street, the more popular something is, the more skeptical you should be.

Stock buybacks, in which companies take their own shares off the market by buying out the investing public, suddenly are sexy. But they don’t always pay off for shareholders.

How sexy are buybacks now? Even Berkshire Hathaway Chairman Warren Buffett, who has never done a share repurchase, is getting in on the act. This week, Berkshire announced it would buy back an unlimited number of its shares whenever, in Mr. Buffett’s eyes, they trade below their true value. All told, buybacks by companies in the Standard Poor’s 500-stock index jumped 22% in the second quarter to $109 billion, according to Standard Poor’s.

Companies must find ways to put their excess cash to use. When the market price of a company’s stock is lower than the “intrinsic value” of its business—the present worth of the cash it will generate in the future—then the company should buy back all the shares it can.

As Mr. Buffett wrote in his 1984 letter to shareholders, when the stock of a growing business with plenty of cash sells “far below” intrinsic value, then “no alternative action can benefit shareholders as surely as repurchases.”

But buybacks are far from an exact science. “You have to take a position on what the intrinsic value of the company is and buy stock only below that number,” says Richard Reese, chief executive of data-management company Iron Mountain, which has repurchased about $120 million worth of its shares since early 2010. Mr. Reese pauses, then adds, “I hope we get it correct.”

At their worst, buybacks can be a form of corporate cannibalism. Often the unspoken motive is to use extra cash to boost earnings per share by reducing the number of shares among which the company’s profits are divided. But that can be a slippery slope.

“If companies use buybacks to try to increase earnings per share, they can almost become trapped,” says Kevin Beech, an analyst at Behind the Numbers, an investment-research firm in Dallas. “If they don’t keep repurchasing stock, their earnings will take a hit. So it can turn into a sort of an addiction.”

Hewlett-Packard has spent $57.6 billion repurchasing its own stock since 2004, according to SP. The total value of H-P’s outstanding stock, after years of management turnover and strategic change, is only $47 billion.

According to H-P’s quarterly and annual reports, the company spent $7.6 billion to buy back nearly 200 million shares over the first seven months of 2011, at an average price of around $38. In 2010, H-P spent $11.3 billion to repurchase more than 250 million shares at an average price of more than $44. The shares traded this week around $24.

Declining to elaborate, an H-P spokesman cited a remark from incoming CEO Meg Whitman on a recent conference call: “In the near term, there is a need to moderate our share buybacks and investments so that we can rebuild the balance sheet.”

H-P isn’t alone. Yahoo also paid more for many of its shares than they are worth today. A spokeswoman says that as the company has repurchased 14% of its stock since 2009, its return on invested capital, a measure of profitability, has more than doubled. But are investors better off? Yahoo, which was above $33.50 in late 2008, traded below $13.50 this week after years of uncertainty about the company’s future wore on the share price.

Imagine two companies, each with $100 in cash and 10 shares of stock. The intrinsic value of each is $10 a share. But the stock market undervalues one company’s shares at $5 apiece and overvalues the other at $20. Each company decides to buy back $10 worth of stock.

The undervalued company gets to buy back two shares at $5 each, leaving $90 in assets spread across eight shares. That raises the intrinsic value of each share to $11.25.

The overvalued company uses $10 to buy back half a share, leaving the same $90 in assets spread across 9½ shares. That lowers the intrinsic value of each remaining share to $9.47.

With a buyback at a cheap company, “the continuing holders benefit to the detriment of the sellers,” says Michael Mauboussin, chief investment strategist at Legg Mason Capital Management, while in an overvalued repurchase “the sellers gain at the expense of the ongoing holders.”

So how can you spot a bad buyback? Here is a red flag: If cash is dwindling as buybacks are growing, the firm may be starving future growth to pay off present shareholders. That is fine if you sell into the buyback. But it is bad if you hang onto your shares. Owning a bigger piece of a corporate cannibal may leave you hungry in the long run.

—Follow Jason Zweig at twitter.com/jasonzweigwsj

Write to Jason Zweig at intelligentinvestor@wsj.com

Article source: Wall Street Journal

 

When Corrie Wilder got laid off from a large magazine publisher in 2008, she figured she could keep working in her field by launching a graphic-design business out of her home.

There was just one problem: The hardware and software she was accustomed to using was no longer at her disposal, requiring her to buy similar technology of her own.

Hal Mayforth

“It kept me up at night,” says Ms. Wilder, 40, of Seattle. “It was an investment I wasn’t prepared to make.”

For people used to working in an office stocked with various tech tools and gadgets, starting up a solo enterprise may mean having to face a painful reality. From computers and high-speed Internet to off-the-shelf software and customized programs, technology is often a pricey prerequisite for getting a new business up and running.

“You don’t have to get the latest and greatest, but you don’t want to buy the cheapest products either,” says Ramon Ray, editor of tech website Smallbiztechnology.com.

Choosing the right kind of hardware and software can be tough, especially if you’re limited to a shoestring budget. Entrepreneurs typically must consider how tech-savvy they are, whether different products and brands can interact with one another and what the future of the company might demand, among other factors.

“You want to make sure the technology you buy will grow with you,” says Mr. Ray. For example, while you might not need a lot of memory on your computer in the beginning, having a significant amount of storage space may become critical down the road.

Heather Haddad learned this the hard way. After finishing graduate school in 2007, she launched Fum[eacute]e Cigars, a bricks-and-mortar and online retail business in Cedar Park, Texas. Though saddled with $200,000 in student loans, Ms. Haddad funded the venture by taking on even more debt, in the form of a $50,000 bank loan, $10,000 in credit-card charges and by borrowing from family.

One of Ms. Haddad’s first technology investments was an inventory-management system that cost her $300. She expected it to automatically remove items from her website as soon as they sold in her storefront — an important task because she couldn’t afford to load up on inventory and wanted to avoid misleading customers about what she had available.

But Ms. Haddad soon discovered that the system couldn’t update information in real time, causing delays. What’s more, it stopped working when she upgraded the program her company website runs on, and the two items must be compatible. To resolve the problem, she found she would either have to spend another $300 on a different version of the inventory system — or go back to using the older website program.

Ms. Haddad chose the latter to save money, and says, in hindsight, she should’ve put more effort into researching her options upfront.

By contrast, Krista L. Sherkey, owner of Streamline6 Communications, a public-relations and marketing agency in Honolulu, says a portable receipt scanner and related software she purchased upon starting her venture is meeting her needs and even helping her save. Whenever Ms. Sherkey incurs a business expense, she uses the scanner to make a digital copy of the receipt. A corresponding program then transfers the data from the receipt into a PDF file on her desktop that she can label.

The scanner and software, called NeatReceipts and NeatWorks, respectively, also can be used for copying and storing data from business cards, insurance forms, legal documents and more. Their combined retail cost is about $200. (Similar technologies include Shoeboxed, Expensify, ExpenseCloud and ScanDrop.)

Ms. Sherkey, 30, says she became her own boss in 2009 because she needed a job that she could perform from any location since her husband’s career requires the couple to frequently relocate. She says being able to compile digital copies of receipts for her business means she can easily analyze her expenses. Recently, she concluded that she had been spending too much taking clients out to lunch.

“I was doing it three or four times a week,” she says. “Now I’m doing it three or four times a month.”

Reading product reviews, participating in tutorials and requesting referrals to other entrepreneurs who have used a particular technology are ways to find out if it’s likely to pay off.

Ms. Wilder, the graphic designer, says she took some of these steps before tapping her savings to buy a laptop computer costing $1,600 and a comprehensive design program for $2,700. She also says having to pay for these items herself prompted her to try to get the most out of what she bought for her start-up, which she named Design Solutions LI.

“It made me want to work a little harder to get those clients,” says Ms. Wilder, who admits at least one other piece of technology she bought early on — a $100 software program for organizing her schedule — proved unnecessary.

“If I could do things over,” she says, “I would spend that $100 on something much more practical.”

Article source: Wall Street Journal

 

When many young people endeavor to purchase their first automobile, they face a wide variety of choices.  One of the choices available is to lease or buy.  If buying, you can purchase the automobile with cash or finance it.  It is highly important to make the right decisions when purchasing a car, since the wrong move can turn that shiny new street cruiser into an automotive prison that locks up your financial resources for years on end.

Most people who are deciding how to purchase a car on paper will reply that it is best to buy with cash.  This is certainly true for people who have enough disposable cash to buy their cars outright, but what about people who need to finance?  The first and most important point of consideration is to make certain that you are not buying more car than you can afford.  One rule that many people support is called the 20/4/10 rule.  Namely that if you are financing a car, put 20% down, finance it for 4 year or less, and make sure the payments do not exceed 10% of your income.  This will ensure that you have positive equity when you drive the car off the lot, which can prove very important if the car is wrecked or stolen.

There are many traps that people can get themselves into with automobiles:

• Lease Trap: Leasing a car sounds great at the beginning, but you rarely get a good deal on the price and there are typically fees and charges that are due when your lease matures.  If you do not have the cash to ‘buy out’ the lease at its expiration, the nice people at the dealership will be happy to ‘bury’ the charges you owe them into a new lease.
• Dealer Financing Trap: Many dealers attract buyers with 100% financing, zero percent interest, easy qualifying, or some other gimmick.  All of this sounds great and induces many people to buy cars at or near the full retail price.  (When you are being financed by the dealer, you have very little power to negotiate a lower price)  However, if something happens to the car, your insurance will reimburse based on market value, which will most likely be less than your car is worth.  Now you have a bill that is due for the remainder between the price you paid and the car’s value when it was wrecked or stolen and that beautiful financing has suddenly evaporated.
• Friends and Relatives Trap: This one almost goes without saying, but great danger can lurk when you purchase an automobile from friends or family.  Before engaging in this sort of transaction, make sure to have the car checked by a competent mechanic or mentally prepare yourself to potentially absorb some unexpected expenses without complaining.

The optimal situation for a person who must finance is to arrange for their financing ahead of time.  This allows them to walk into a dealership knowing exactly how much car they can afford to buy, exactly what the rate will be, and exactly what the payments will end up at for a given price level.  This allows you to negotiate the ‘price’ instead of the ‘payment’ with the sales representative.  If the best deal they can offer isn’t to your liking, you have the power to walk out and go somewhere else because your financing is not captive to one particular dealer.  Even if the rate you get from the bank is higher than the one offered by the dealer, you will have the ability to negotiate down the price and reduce your risk of loss if the car is damaged or stolen.

In the end, it is highly important to avoid turning our car into an automotive prison.  By planning ahead and making prudent decisions, this goal can be easily accomplished while walking down the path of financial success.