So, I had this dream about Paris the other night. Paris Hilton.
Yeah, I know. Sounds like the first line of a story that should be on one of those other websites. But bear with me; there's a point to be made about personal finance.
Like I said, the Paris Hilton dream. it took place at a party. It wasn't the kind of party I imagine Paris actually frequenting. It was more like the Iron Range cabin parties of my youth. To judge by the refreshments, Anheuser-Busch's
There was Paris, the overly blond, big Farrah-haired version who has been showing up on Yahoo!'s
When it was my turn, there was the slinking and purring, vague promises of tantalizing favors if only...
Get this: She asked me to sign up for a credit card.
My response, upon being propositioned by the Internet's most searchable babe, was, "What's in it for me, and how much is it going to cost?"
Believe me, I sat bolt upright, horrified. I don't know what was more embarrassing, the dream itself or the pecuniary response. I mean, this was a dream, where you can do anything -- without having to explain it to your wife, your priest, or the entire World Wide Web.
What was my problem? I immediately remembered a recent barb from Expeditors International
Playing armchair psycho, I mean, psychologist, I attribute the dream to a few factors. First, I blame it on the media. (Everyone else does; why not me?) Do I really need to see Paris Hilton every time I turn on the tube or try to do a Web search? Next, I blame the allure of easy money. See, Paris wasn't really Paris, but a surrogate for fiscal fascination. I'm not really preoccupied with credit (I carry a nifty Fool card).
What Paris really represented was a hot young slice of assets. Paris was a stock like Travelzoo
My response, on the other hand, was pure Foolishness. After I got over the embarrassment, I realized that I had only done what any prudent (and maybe prudish?) investor should do upon being wooed by an attractive offer that looks a bit unseemly around the edges and seems too good to be true. As with choosing people, when you're looking for a stock hookup, a lot of later regret could be avoided by simply asking some Foolish questions up front.
What do you do?
Good answers include stuff like: "We're the world's largest retailer because of our low prices and innovative cost controls." In that case, you'd be sidling up to someone such as Wal-Mart or Home Depot. If, instead, you hear things such as "We create knowledge-based value in emerging markets," chew your arm off and flee. You've got an Enron on your hands.
How do you make your money?
Seems a bit rude and repetitive, but this isn't the same question as No. 1. Marvel Enterprises, for instance, creates great superheroes. But the money is made via licensing deals with moviemakers, toys, and video games. Carmakers such as Ford and GM earn an awful lot of their dough not by making cars but by making car loans. The answer to this question may surprise you, which is why it is so important to ask.
Can I trust you with my wallet?
Personalities and ethics are pretty darn important when you're handing over your hard-earned money for someone else's use, and that's exactly what you're doing every time you buy a stock. You're giving the firm a grubstake, trusting that management will use its capital wisely to create future wealth for you. Take a look at what company insiders are doing with their own stock. If they don't have confidence in the firm, you shouldn't either.
How much do you make?
OK. A little blunt again. But this is another one of those questions that is more complex, and more important, than it seems. The easy answer you're likely to get from the purring kittens at investor relations will be something like, "Well, our earnings last year came to $134 million, or $1.45 per share."
All right, how much do you really make?
This is a much more Foolish follow-up. As we've said in these pages time and time again, earnings are really an opinion. You want to know how much cash, cold, hard green, you can expect, because that's much harder to fake. For that, you want to know about free cash flow (FCF), which is, much oversimplified, the amount of cash your prospective partner will give you after shelling out operating costs to run the business and pay for capital upgrades. In other words, if the object of your desire takes in $1.45 but spends $1.35 of that on lipstick or hair gel, there's only a dime left over for you.
Are you getting any better with age?
Face it. Everything young and exciting eventually gets older, or at least it matures. You want to make sure that the outfit you're getting involved with will get better with age. (Think of Microsoft and its recent dividends.) After all, when you're paying money up front for something, you're doing so because you expect it to be worth more in the future. You want to see growth in revenues, earnings, and FCF, or you want to know why you aren't, and pay accordingly.
What's it gonna cost me?
This is the easiest of them all. The answer's just a click away. Some might try to snow you with an answer like, "Only forty bucks per share." But you can be more sophisticated than that by looking beyond the raw dollars to ratios such as price-to-earnings and price-to-free cash flow. You can make up others in order to get a clear picture of the business. For instance, Travelzoo's $40 shares price the business at more than $2 million for each of its paying advertisers. Sirius Satellite Radio
What's in it for me?
The most vulgar question of them all, but given the examples above, you see how important it can be. It's also the most frustrating query, since there's no right answer -- and that's why we have a stock market. Different companies offer different rewards. Growth stocks offer excitement and the possibility for huge rewards down the road, but you generally pay a big price up front. Still, the chance to snag a beauty such as Starbucks can pay back quite a bit of heartbreak along the way.
Many of us are fascinated by undiscovered gems, small, increasingly attractive companies that are ignored by the market. Others may be interested in the real ugly ducklings: firms that have really screwed up and aren't being credited yet for making things right.
Still others have the guts to say, "Forget it, honey. I'm over my need for excitement, and I want you to pay me." In that case, you'll want to look at stocks for income investors. Even a relatively second-rate dividend payer such as McDonald's, which has thumped the S&P 500 over the past year, also hands you 1.5% in cash, which is better than most savings accounts these days. (And yes, we have a guy who specializes in finding these, too.)
All of this suspicion and second-guessing may seem like a big hassle, especially when it gets in the way of passion, but I urge you to go through with it. It's the absolute minimum I do, because in reality, I do dream of Paris pretty often. And I dream of Brittany, also Milano, Alba, Roma, Diaz, and a lot of other great foreign destinations I would like to see during an early retirement. The way to get there isn't to squander your precious resources on overpriced glitz and glamour. On the surface, beauty is fleeting. Real value, the kind that rewards you over a long, prosperous life, takes more work to find.
For help in planning your financial future, try one of the Fool's market-beating newsletters. All are risk-free.
At the time of publication, Seth Jaysonowned shares of Marvel Enterprises, but had no position in any other company mentioned. View his Fool profilehere. The Motley Fool is investors writing for investors.