In my line of work, as a writer of profound financial essays, I naturally end up in occasional conversations with friends and strangers about the economy or investing. Sometimes I end up surprised at how I have to set someone straight or correct some misguided thinking.
Since you're here reading a Motley Fool article, odds are that you might have some friends with misconceptions that you can address. Why not do them a favor and talk about money now and then? Here are a few sample conversations I've engaged in lately.
"We're just focusing on the mortgage"
After the market imploded in 2008, I heard someone say, "We're just focusing on paying off the mortgage." Hmm ... well, it is indeed good to pay off one's mortgage. And if you're financially strapped, it's smart to focus on your mortgage and not fall behind. But if you have some extra money and you're plowing it all into your mortgage, think again.
I'm in the same situation. It's very tempting to try to make your mortgage disappear as soon as possible, especially if you don't like being in debt. But look at the big picture. Is your mortgage at a low rate, like 4%, 5%, or even 6%? If so, when you make extra payments, it's like you're earning that return. That's good, and it's a guaranteed return. But remember that you can make more money elsewhere, such as in stocks. They've averaged 10% over the long haul, and even if you average an 8% return, that will beat mortgage prepayments. Granted, those returns are far from a sure thing -- but it's at least a hint not to put all of your extra money into your mortgage.
Another thing to consider is that right now is a special time in the market's history. We're coming off of a crash, and stocks seem more likely to go up than down. This is a rare opportunity, a time when you can more easily find attractively priced companies that will dominate their peers. Carpe diem!
"I might buy some GM"
Someone else I encountered explained that she just invests in real estate, not stocks. Then she added that she might buy some General Motors stock. Hmm ... well, it is smart to invest in what you know best, and she does seem savvy about real estate. But to invest only in that is not very diversified. After all, real estate prices do fall from time to time. And over long periods, real estate returns are lower than stock returns, in general.
I happen to know that she was interested in General Motors for sentimental reasons. But GM stock is in its death throes. If she's interested in stocks, she should look for the best buys she can find, period.
One place to start would be looking for growing businesses with fairly reasonable valuations, strong returns on equity, and healthy balance sheets. Here are some examples:
Company |
CAPS Stars (out of 5) |
3-Year Revenue Growth |
Return on Equity |
P/E Ratio |
---|---|---|---|---|
Research In Motion |
*** |
66% |
33% |
17 |
Western Digital |
**** |
17% |
16% |
18 |
Synaptics |
**** |
32% |
23% |
21 |
Sohu.com (Nasdaq; SOHU) |
**** |
55% |
31% |
13 |
Petroleo Brasileiro |
***** |
11% |
17% |
17 |
Precision Castparts |
***** |
10% |
17% |
17 |
Garmin |
*** |
22% |
23% |
11 |
Source: Motley Fool CAPS.
"What do you think of gold?"
Another person cornered me once, and asked what I thought of gold. He noted how it has risen so strongly lately, and was impressed, thinking it's a good buy. I explained that over many, many years, gold has been a terrible long-term investment. In fact, over 200 years and after adjusting for inflation, you would have lost money in gold! It's true that there are periods when it soars (like recently), but there's no reason to assume that will continue, or that it won't later fall. My colleague Christopher Barker is much more positive about it.
I would encourage anyone interested in gold not to forget about stocks. There are plenty of stocks that are at least as good as gold -- and many that are even better.
Many beginning investors' mistaken assumptions can be corrected easily -- do your friends a favor and set them straight on a few matters. You'll likely set them up for a more comfortable retirement!