Bare Escentuals IPO

Great news! I was allocated shares of the Bare Escentuals IPO. Bare Escentuals (Nasdaq: BARE) priced on Thursday afternoon at $22 per share. Bare Escentuals, which is based in San Francisco, develops and markets mineral-based cosmetics. They were originally expected to sell 16 million IPO shares at between $15-17 per share.

The final share pricing of $22 per share indicates a high degree of demand for the underlying stock. I expect BARE to rise well above the $22 IPO price in early trading on Friday morning. Buying shares in an IPO such as this one is an almost certain guarantee of make money. Buying IPO stock is one of my investment strategies. I'll write more about the intricacies of subscribing to and getting an IPO share allocation in a later post.

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About Dividend Yields

One of my investment strategies is to buy dividend-paying stocks. When making investment decisions on dividend-paying stocks, it is important to know what the dividend yield of the stock is. Basically, a dividend yield is the sum of the regular dividends that a company pays over the course of a year, divided by the current stock price. In the United States, most dividend-paying stocks pay out every three months (quarterly). In a previous post, I stated that Pfizer (NYSE: PFE) had a dividend yield of 3.43%. Currently, Pfizer pays 24 cents per share in quarterly dividends, for a total of 96 cents in dividends per year. At the time of my post, Pfizer was trading at 27.96. If you take the annual dividend divided by the price, you get 0.96/27.96 = 0.0343 or 3.43%.

[Note that PFE has risen in price to 28.41 and the yield is now 0.96/28.41 = 3.38%. It is important to know that when the stock price goes up, the yield goes down. On the other hand, if the stock price went down, the yield would go up.]

When researching a stock at a financial website such as Yahoo Finance, the dividend and yield is listed with the company quote. I estimate that 95% of the time this number is correct. However, sometimes this number is inaccurate or outdated. This can be the case if a dividend has been reduced or eliminated. For example in another post I mentioned that NetBank has sustained a series of quarterly losses, and its management has decided to suspend their dividend. So the yield for NetBank (Nasdaq: NTBK) is actually 0%, but the Yahoo stock information still indicates that it pays a dividend.

Another case is when a one-time special dividend is paid by a company. This will make you believe that the dividend (and thus the yield) is greater than it really is. Unfortunately, it is not always obvious whether a dividend payment is a regular dividend or a special dividend. So be careful when looking only at the dividend yield statistic on financial sites.

While dividend yield is an important criteria used for selecting stocks worth buying, it is not the only criteria. Dividend yield is not the most important criteria either. In future posts, I will cover some of the other criteria that I use for selecting stocks to buy.

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The Backwards Investor

Would you rather make 21% in a year on your investment or lose 18% in a year on your investments? Believe it or not there is a subset of investors who would rather lose 18% than gain 21% on their investments. Let me clarify. The Standard and Poors (S&P) 500 index went down 23.37% (excluding dividends) in 2002. In 2003, the S&P 500 gained 26.38%. There is a subset of investors who strive to "beat the S&P 500." This perverse group of people would be thrilled to have lost 18% of their money in 2002 because they would have beaten the S&P 500 by over 5%. (If you didn't invest in the stock market at all and ended up with a 0% return, you would have beaten the S&P 500 by 23% in 2002.) In either case, I didn't exactly see many people celebrating their investment portfolios at the time.

By contrast, These same folks would be bummed out to make only 21% on their investments in 2003 because they would have underperformed the S&P 500 by more than 5%. I don't know about you, but I would happy to make 21% in a year on my investments, and would feel ashamed to have lost 18% in my investments. The truth be told, I used to compare my stock performance against the S&P. I don't do that anymore, after I saw how ridiculous that comparison can be. This reminds me of the "keeping up with the Joneses" comparison in personal finance. My advice is not to constantly compare your portfolio performance with the S&P, Nasdaq, or your neighbors. Instead, strive to improve your own position year over year.

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Sayonara NetBank

I have started the process of evacuating my money from NetBank. To make a long story short, I haven't paid a lot of attention to NetBank for a couple of years. I recently started to compare my various bank accounts, and I was shocked at how poorly the money market account I opened at NetBank was doing. Let me go back to the beginning.

I first opened my Net.B@nk (that is what they used to call NetBank) account six years ago. At the time, they offered interest rates of about 6% which was quite good at the time. I really wasn't so bothered by the fact that it was an Internet-only bank. True, deposits at NetBank took longer (usually over a week), and my checks were considered out-of-state. But that was only a slight inconvenience when you consider that the interest rate was about 2% more than what local banks were paying. To add to that they gave me a nice little bonus for opening my account.

Over the years, things have gone downhill at NetBank. They stopped sending me paper statements in 2001, and started to charge more fees. But, the interest rates still remained better because of their Internet-only model.

Fast-forward to today. NetBank is only paying 2.90% APY on my money market. Currently, I can get a 5.oo% APY return on money market accounts at either Citibank and WaMu (Washington Mutual). And these banks have real branches and ATMs. I was wondering why there was such a big discrepancy when NetBank does not even have to maintain the bricks and mortar branches and ATMs that these competitors do. As you will see later, the real answer is NetBank can no longer afford to pay good interest rates.

I could bore you with a laundry list of other reasons why I've decided to get out of NetBank, but it really comes down to poor interest rates and the inconvenience of having to deal with an internet only bank. I also think that there may be larger problems at NetBank.

The stock analyst side of my personality took a look at the overall company, NetBank (Nasdaq: NTBK), and I have some real concerns. NetBank stock has been steadily declining for over three years now. The company has posted significant losses for the first two quarters of this year. And NTBK has stopped paying its dividend. This is not good news for either NTBK investors or NetBank customers. NetBank's management has not adequately explained the reasons for these significant losses. In this era where the news is reporting one business scandal after another, I smell something fishy.

The worst case scenario for NetBank customers will be waiting for months to get their money back from the FDIC if NetBank defaults. More realistically, it is likely that NTBK will be acquired or merged into another bank. In any case, don't want to stick around long enough to see the fallout. I just hope that closing my account with them is not as difficult as putting money in with its long delays.

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How to Calculate APY

Have you ever wondered how banks calculate the annual percentage yield (APY) of a bank account? Suppose that an account pays 5.84% (nominal rate) compounded daily and yields 6.01% APY. The APY is the annual percentage yield, and is the best number to use when comparing rates from different banks. To calculate the APY from the nominal rate, you will need a scientific or financial calculator. A computer spreadsheet could be used instead of a calculator.

Warning: math is involved in the next section. In this example,

1) Enter the interest rate in decimal form: 0.0584
2) Divide the rate by 365 (number of days in a year)
3) Add 1 to the result
4) Then use the y^x key, and type 365 for the number of days.

You should end up with something that says 1.060134.... The digits after the decimal point represent the APY. In this case, it is 6.01% APY.

Shortcut: In most cases, you can take the nominal interest rate: 0.0584, and hit the e^x key on your calculator to get 1.060138.... This quickly approximates the APY, assuming that interest is compounded daily.

If you have an account that is compounded monthly, then replace the 365's above with 12 (number of months in a year). In this case, if interest were compounded monthly, then the APY would round off to 6.00% APY.

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The Squirrels Club

I remember opening my first bank account when I was about 7 years old. It was at a bank called Glendale Federal Savings, at the corner of 25th Avenue and Geary Boulevard in San Francisco. They offered a special account for children called the Squirrels Club account. The club would send a newsletter every few months and gave me a bank for saving coins in. The newsletters featured squirrels as cartoon characters with the head squirrel named Filbert. The materials included games, puzzles, and tips on such things as saving money. The educational part of the newsletter would explain things like interest compounding. I believe that the Squirrels Club was run by an association of different savings and loans.

I was a Squirrels Club member until I was 12 years old. After that, my account was changed to a regular savings account. Looking back, I think that it is a pity that more banks don't offer this type of club for young savers. The educational material that they offered really formed the foundation of how I think about money today as an adult. Actually, the Squirrels Club still exists in a different incarnation. This was the only information that I could find on the Internet.

As far as Glendale Federal is concerned, it went through different incarnations in its history. I think that they changed the name once to West Coast Federal Savings, and then back to Glendale Federal. In the late 1990s, they advertised that as a small bank, they were able to give superior customer service. This was largely a true statement. That was before things started to change.

Glendale Federal was acquired by California Federal Savings which was for the most part acceptable. Then CalFed was finally bought by Citibank. So, what was to me a small bank with good customer service was replaced with one of the biggest, most impersonal banks in the country.

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Investing in the Cruise Line Industry

Carnival Corporation stock (NYSE: CCL) is the largest cruise line operator in the world. In the United States, it operates several different cruise lines including Carnival, Princess, and Holland America. A few years ago, Carnival merged with Princess, and there are actually two stock symbols for Carnival. CCL is the symbol that represents shares in the original Carnival Corp. The symbol CUK represents American Depositary Shares (ADS) of the original Princess Cruise Lines, and is called Carnival plc. Carnival has what is called a dual listing on the London and New York Stock Exchanges. This arrangement is confusing, even to me. Although the two stock symbols technically represent two separate companies, they have the same management, and for all intents and purposes the stock prices move in lockstep with one another. I have only ever invested in the CCL symbol stock. CCL closed on Wednesday at 43.85.

Carnival's biggest competitor is Royal Caribbean (NYSE: RCL) which includes Celebrity Cruises. I also own shares in RCL which closed on Wednesday at 38.00. The third major player in the US cruise market is Norwegian Cruise Lines. However, NCL is owned by the Genting Group of Malaysia (which also owns the Asian cruise line Star Cruises). It would be difficult for US residents to directly buy shares in Genting. Though, it is possible to buy and an Exchange Traded Fund (ETF) which holds shares in Genting. This fund is the iShares MSCI Malaysia Index (AMEX: EWM).

Admittedly the timing of this post might be a little late as the cruise industry has already started to rally. The price of fuel factors in as a key component of the latest price movements. In the graph below, Carnival (CCL) is represented by the blue line. The red line is the U.S. Oil Fund ETF (AMEX: USO). This is another ETF that tracks the price of crude oil. Over the past few weeks, you might have noticed that oil has dropped in price. This is evident if you noticed that you're paying a little bit less at the pump for gas. As you can see in the graph, the price of oil has dropped while the price of CCL has increased.

In addition to the recent upward movement of cruise line stocks, I will add some of my usual criteria for purchase of CCL & RCL. Both are profitable companies that pay a dividend.

There is one more bonus, if you are considering going on a cruise in the near future. Both CCL & RCL offer a Shareholder Benefit in the form of an onboard credit for booking a cruise. For example, each offers a $100 onboard credit for shareholders that book a 7 day cruise and a minimum of 100 shares.

Update: If you were searching for information about how to get the Shareholder Benefit offered to cruise line stock holders, please find the details in my post about cruise line shareholder benefits for RCCL and Carnival stock holders.

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Calculating Net Worth

I thought that calculating one's net worth would be pretty simple. Add up the value of your assets and subtract your liabilities (debts) to arrive at your net worth. Having looked through a few blogs, however, I see that the definition is neither simple nor consistent. I've seen one guy who has listed over $50k in automobiles and the value of jewelry as "assets". On the other hand, I was recently reading a book (Getting Loaded by Peter Bielagus) where in calculating net worth, the author deliberately excludes things such as cars and other depreciable assets from the calculation.

I agree with the latter formula. I don't include what I would call non-financial assets as part of my net worth. I wouldn't consider stamp and coin collections, or jewelry to be financial assets. The reality is that while these items do have value, it is not as if I would be willing to sell any of them, or that I would rely on them for income. Similarly, I don't consider my primary residence an asset for the purpose of calculating net worth. In fact, I've seen a few questionnaires (that brokerage houses use to determine the suitability of certain investments) that specifically ask for net worth excluding one's primary residence.

Getting back to the question of net worth, I suppose that if one would exclude the value of their home from the calculation, then one could also exclude their primary mortgage (but not their second mortgage since that is not usually used to finance the house, but other consumer items instead) from their liabilities. Why do people try to inflate their net worth by including miscellaneous non-financial assets? My guess is that is like the game people play with inflating their resumes when applying for a job. You may be able to fool other people into thinking that your net worth is more than it is, but just be certain you aren't just fooling yourself.

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Wealth According to The Millionaire Next Door

To answer the question of whether one is wealthy, I will take a quote from The Millionaire Next Door, by Thomas Stanley & William Danko, which I read a few years ago. I consider this book to be a classic. Here, the authors discuss what one's expected net worth should be at any given point in life.

Multiply your age times your realized pretax annual household income from all sources except inheritances. Divide by ten. This, less any inherited wealth, is what your net worth should be.

To give an example, suppose one is 35 years old and makes $100,000 per year. Then, by the above formula, one's expected net worth is $350,000. The authors then go on to describe the wealthy (prodigious accumulators of wealth, PAWs) as those who have at least double this expected net worth based on age and income. Conversely, one who has accumulated less than half of their expected net worth is known as an under accumulator of wealth, or UAW. (I have always found it peculiar that this acronym is the same as the one used by the United Auto Workers union, but that is another story.)

In any case, the suggestion by the two authors is a broad rule of thumb. I would caution one against putting too much weight into the usefulness of a rule of thumb. Nevertheless, armed with this knowledge, you can at least have a rough idea of where you stand with regard to what your savings should be at any point in time.

Update: See also As a Rule of Thumb...
and The Millionaire's Rule of Thumb.

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Stock Pick: Pfizer (PFE)

I'm ready to make the first stock pick on my blog. I am now recommending Pfizer Inc. (NYSE: PFE) for purchase. This pharmaceutical giant is a member of both the Standard and Poors 500 index, and the Dow Jones Industrial Average (DJIA). Pfizer is one of the largest makers of prescription drugs.

This stock closed on Friday at 27.96. Pfizer's stock price has stagnated for over a year, trading in a narrow range in the mid-20s. However, PFE has recently begun upward price movement, with Friday's close being a new 52-week high. My opinion is that Pfizer (and several other large pharmaceutical makers) are coming off of a period of depressed stock valuation.

I have picked Pfizer because it satisfies the following criteria:

• Profitable for the last 3 years, and consistently profitable for several years (Source: S&P Stock Reports): In general, I will not recommend an unprofitable company for purchase.
• Current dividend yield of 3.43%: I like to know that if the stock price stagnates, that I will still receive some income for having my money tied up.
• Large capitalization stock: PFE has a market capitalization of $200 billion. As a general rule, large companies are less volatile than smaller ones.

There you have it, my first stock pick.

Looking for My Coke Rewards Codes? Keep searching!

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Disclaimer

Before I get too far along here, I thought that I would write a disclaimer.

First of all, this is a personal blog, and I am not a financial advisor. The material provided by PFStock is for general information only. This information is not intended as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation or sponsorship of any company, security or fund. Readers should not assume that any recommendations made by PFStock will be profitable.

In other words, if you invest in something that I've mentioned here and lose money, then I'm sorry that this has happened, but I can't accept responsibility for your loss. On the other hand, if you do the opposite of what I've suggested and lose money, then I would say that I told you so.

Lastly, readers accept responsibility for their own investment research, due diligence and decision making. All investments involve risks and are not guaranteed. You may wish to seek the advice of a professional before investing.

Copyright © 2006 pfstock

Citibank Dividend MasterCard

I was going to write an entry about how much I like the 5% cash back feature for purchases at supermarkets, drug stores, and gas stations that I get with my Citi Dividend MasterCard. However, Citibank changed the rules. They recently sent me a letter stating that as of October 13, 2006, I will only be getting 2% cash back on my "everyday" purchases. I also noted that they added convenience stores and utilities to the purchases eligible for 2% cash back.

The way that this credit card works, one accumulates Dividend Dollars for the above mentioned "everyday" purchases. For all other purchases, a 1% cash reward is earned. Whenever $50 or more is accumulated, I can request a check from Citibank. They will pay out the entire balance, not just the minimum amount of $50. Believe me, this is a lot less hassle than a lot of the other rewards cards. In many other cases, I've found myself browsing through reward catalogs to find something that I had enough points for, and that I really wanted to get. Also, the Citi Dividend credit card is not a tiered award where you have to spend a certain amount (usually a few thousand dollars) before you qualify to get the maximum rate.

With the reward changing from 5% to 2%, this of course dampens my enthusiasm for using the card. On the other hand, I don't really have any better alternative card to use at the time. The 2% rebate is a lot better than most of my other credit cards which pay nothing. I would be interested, though, to see if another better offer will come along.

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