I've been writing the Fool's weekly newspaper feature for several years now, and, in true Foolish spirit, it's interactive. Readers are invited to send in questions for the "Ask the Fool" column and they have, in droves, permitting me to answer nearly 400 questions so far. I've often been asked if we offer a compilation of those questions and answers, and I've always had to regretfully say no. Until now.
We're happy to announce a new Fool book: The Motley Fool Money Guide: Answers to Your Questions About Saving, Spending, and Investing. Questions and answers from our newspaper feature, updated and revised, make up about half the book, while the other half is entirely new material.
For an idea of what you'll find in the book, here are some of the chapter headings: Saving and Budgeting, Credit Cards and Debt, Insurance, Buying a Car, Buying a Home, Paying for College, Banking Foolishly, Retirement, Death and Estate Planning, Wall Street's Ways, Understanding Stocks, Researching and Evaluating Companies, Buying and Selling Stocks, Mutual Funds, Managing Your Portfolio, and How Businesses and the Economy Work.
The next best way to tell you about our new guide is to share some of its contents. Below you'll find a full 1% of the book, in the form of five questions and answers. Please understand that the best way to really check out the book is to get your hands on one. You can find it in your local bookstore or in our own store, FoolMart, which offers a money-back guarantee to boot.
So give it a look and see if it will help answer some of your burning questions. Or consider giving it as a gift -- it's ideal for beginning and intermediate investors, and can be useful for more advanced investors, as well. It's a great reference to have on hand as you read books and articles on business and investing.
Without further ado, here's the sneak peek at five excerpted questions and answers from The Motley Fool Money Guide: Answers to Your Questions About Saving, Spending, and Investing.
Q. When in the home-buying process should I shop for a mortgage?
A. It's best to do this before you even begin house hunting. You'll have a leg up, knowing exactly what you can afford, and you'll strike sellers as a serious buyer. Don't let yourself feel intimidated by the process. Remember that lenders serve you, not the other way around. You'll be paying a lot in interest for many years, so you want to find a lender who'll serve you well and fairly.
You should not only shop for a mortgage before you shop for a house -- you should also get "pre-approved." With a pre-approval or pre-qualification letter in hand, you'll be in a stronger position when it comes time to negotiate a purchase.
A pre-qualification letter is somewhat informal. It typically costs nothing and isn't binding. It merely says that, based on what you've told the lender, they're ready to lend you the money -- and states a ballpark amount you will qualify for. Of course, they may change their mind, especially if you've misrepresented any information. There isn't any (or just minimal) background-checking done with a pre-qualification letter.
Pre-approval is a bigger deal. It means the lender has checked out your employment and salary information, your credit record, your assets, and your debts. Many lenders don't charge for pre-approvals, but some do.
Q. What does it mean when someone refers to a company's "business model"?
A. A firm's business model is simply the method by which it makes its money. Some examples: Wal-Mart's(NYSE: WMT) business model was initially to establish profitable stores in small communities that other discount chains had dismissed. Coca-Cola's(NYSE: KO) business model involves using its secret formula to manufacture syrup that it supplies to bottlers. By distributing its beverages through stores, restaurants, vending machines, and more, it's attempting to make its drinks easily available to anyone.
Online auction site eBay's(Nasdaq: EBAY) business model is to connect individual buyers and sellers through a website, and to profit by charging fees and by taking a percentage of each sale -- all this without carrying any inventory. Fellow online commerce enterprise Amazon.com(Nasdaq: AMZN) has a different model, which requires it to keep many products in stock so that they can be quickly shipped to customers.
Q. Is it better to buy a company before or after its stock splits?
A. That's like asking, "Should I eat this peanut butter and jelly sandwich before or after Mom cuts it in half?"
Stocks don't become more inexpensive when they split. True, you get more shares. But, each is worth less. Imagine that you own 100 shares of Sisyphus Transport Corp. (ticker: UPDWN). They're trading at $60 each for a total value of $6,000. When Sisyphus splits 2-for-1, you'll own 200 shares, worth about $30 each. Total value (drum roll, please): $6,000. Yawn.
Some people drool over stocks about to split, thinking the price will surge. Stock prices sometimes do pop a little on news of splits, but these are artificial moves, sustainable only if the businesses grow to justify them. The real reason to smile at a split announcement is because it signals that management is bullish. They're not likely to split the stock if they expect the price to go down.
Splits come in many varieties, such as 3-for-2 or 4-for-1. There's even a "reverse split," when you end up with fewer shares, each worth more. Companies in trouble employ reverse splits to avoid looking like the penny stocks they are. If a stock is trading at a red-flag-raising $2 per share and it does a reverse 1-for-10 split, the price will rise to $20 and those who held 100 shares will suddenly own just 10 shares.
Q. Can you explain the various fees that mutual funds charge?
A. Virtually all fund fees fall in two categories: loads and expense ratios. A load is a onetime sales charge. Front-end loads are levied when you deposit money into a mutual fund, and back-end loads, also called redemption fees, are exacted when you withdraw money. A typical load is around 3%. As an example, we tossed a dart at a bunch of funds and it landed on the Seligman Communications and Information Fund -- Class A. (Classes B and D have different fee structures.) This fund has a 4.75% front-end load, so if you want to plunk $10,000 into it, $475 would be deducted from your money up front.
Loads exist to support brokers and aggressive sales efforts that bring more money into the fund and into the fund company coffers. This isn't usually in your best interest as an investor, so Fools favor no-load funds. These often fare better than load funds and have lower expense ratios, too.
With no-load funds, you just need to focus on the expense ratio. Chairs, computers, catered holiday parties, and other administrative costs that support the fund are included in this annual fee. Two of its components are often reported separately: 12b-1 and management fees. The 12b-1 fee is defined as covering marketing expenses, but it's essentially a continual load in the form of an annual sales charge. Management fees pay for fund manager salaries. The median total expense ratio is around 1.00% and the Seligman fund comes in at 1.44%. Included in the 1.44% is a 0.25% 12b-1 fee and a 0.98% management fee.
Index funds, which the Fool recommends for investors who want to invest in mutual funds, typically sport very low fees and outperform most other funds. The Vanguard Total Stock Market IndexFund (ticker: VTSMX), for example, has no load and a piddly annual expense ratio of 0.20%. With a $10,000 investment, that amounts to just $20. Your money has a much better chance of growing if 99.8% of it is left to grow.
Q. How should I make sense of "inventory" on a company's balance sheet?
A. Inventory refers to all items in a company's production pipeline. There are three main categories of inventory: raw materials, work in progress, and finished goods. Imagine PlastiCrania Inc. (ticker: NOGGN), which makes Mr. Burrito Head toys. Making the toys involves ordering, receiving, storing, and using raw materials, such as chemicals, cardboard, and paint. These are assembled into finished products. At any time, PlastiCrania's inventory is likely to include vats of plastic, half-assembled burrito molds, finished products waiting to be shipped to distributors, and returned products from retailers.
If a company carries too little inventory, any shortages that occur will hold up production. Too much inventory will generate high storage costs and tie up capital that could be used elsewhere. Finished goods sitting on shelves a long time also pose a risk of not being sold due to obsolescence. In recent years, many American companies adopted "just-in-time" inventory systems pioneered by the Japanese. These systems have firms holding precisely the minimum necessary inventory, replenishing supplies continually as needed.
Compare a company's inventory levels with those from the year before, and with revenue growth. If inventory is rising faster than revenues, it could signal a sales slowdown. If inventory growth lags sales, either the company is not meeting demand or it's successfully tightening controls on production processes and distribution.
Selena Maranjian owns shares of eBay and Amazon.com. Her goal in life is to make the incomprehensible comprehensible. (Or is it to make the comprehensible incomprehensible? Hmm...) To see Selena's complete stock holdings, view her profile. The Motley Fool is investors writing for investors.
