Best Investment Part 4: Bargain Hunting

So now you've looked at a few companies, made sure you have a diversified group, and that most of them are best of breeds. How do you decide WHEN to buy? Do you just dive in all at once, and set up your entire portfolio in one shot? Just like all of my rhetorical questions, you know what the answer is. You want to buy stocks in the same way hopefully you buy most things, that is, at a fair or, even better, at a discounted value. But how do you determine the value of stocks? We'll go over just that in this post.  

I think what confuses and potentially intimidates people about buying stocks is the risk or uncertainty of how they will perform.  People hear stories of how their friends buy stocks, and even though the companies do well, the stock price decreases in value.  That happens when the overall market thinks the company is not going to meet future expectations, even though they have met past ones.  You see, there are two components of the value of a stock. The first component is what's on paper, i.e. the earnings, profit, operating costs, revenue, etc. The second component is the estimate of potential growth, which is a bit more hazy, as nobody can really predict the future entirely.  

This second component of the stock value can be ascertained through several ways, namely the company's own forecasts, the expectations of third party financial analysts, and even the borderline speculative ideas we talked about in the previous post, e.g. "Apple will take over the smartphone market with it's Iphone."  Professional analysts come up with their estimates via various methods, including polls, very complex mathematical models, and talking with company insiders.  I've listened to a lot of analysts' arguments, and I have yet to find one where I didn't think was subjective in a way.    

You can probably ascertain that, in my opinion, the more dependable data in terms of valuing stocks is the factual and objective data of a company.  Like I said in the last article, estimates and predictions of a company's future can be useful as perhaps a catalyst, but the foundation of valuing stocks should be the company's actual performance.  In addition, if a company has historically performed well, they most likely will continue to do so.   

OK, so you need to look at the objective facts.  What are they?  The most important piece of data you should examine is the Price to Earnings ratio (P/E ratio). The P/E ratio is the stock price divided by the annual earnings per share. Sounds like a bunch of calculus, right? Well, the good thing is you don't really have to remember this formula, but you just have to know how to use it. The P/E ratio gives you an idea of how much you are paying for a company's profits. Let's say for the last 12 months, a company has made a profit of $1000. The company has 10,000 shares, so its earnings per share would be ten cents. If its stock price is $5, then its P/E ratio would be 50. In another words, you're paying $50 for every $1 the company makes. If that sounds like a lot, you're probably right. Most people consider a company fairly valued with a P/E ratio around 15-20, but the P/E ratio is also industry and history dependent. For example, an industry like the technology sector generally has higher average P/E ratios.  So if you're buying a company like Microsoft, you need to compare its P/E ratio with other big software companies.   

Also keep in mind that every company is unique in how it grows, so you also need to look at historical P/E ratios. A good website among others to do that is Forbes.com.  As an example, let's look at the historical P/E ratios of General Electric.  

Current P/E Ratio 13.1  

P/E Ratio 1 Month Ago 13.4  

P/E Ratio 26 Weeks Ago 15.3  

P/E Ratio 52 Weeks Ago 18.5  

5-Year High P/E Ratio 24.2  

5-Year Avg. High P/E Ratio 21.5  

5-Year Low P/E Ratio 13.7  

5-Year Avg. Low P/E Ratio 16.9  

5-Year Avg. P/E Ratio 20.3  

You can even go back further on your own, but just looking at these values, you can see that GE is the cheapest than it's ever been in the last 5 years.  And when we look at similar companies, the industrial average is about 16.  So then should you buy GE now?  Yes, GE is a great buy right now, but let's examine my last point about P/E ratios before we make the decision.   

You may have heard recently that the stock market is a "bear" market. This means that the Dow Jones Index has lost at least 20% of it's value from it's most recent highest point. (The term "bear" is used to define a pessimistic investor, whereas an optimistic investor is called a "bull.") A bear market usually reflects a time of economic downturn. Most recent bear markets were the collapse of the silicon valley bubble, the savings and loan crisis in the 80's, and the oil crisis in the 70's. The reason I bring up the bear market is that in such a market, P/E ratios are often reset to lower values. This is because there is a general market-wide loss of confidence. So if you decide to invest today, you would probably benefit from lowering the P/E standards a few points. Going back to our example with GE, you can certainly buy it now, as it is very cheap compared to its historical value. However, because we are in a bear market, it may be wise to have a lower P/E standard, i.e wait until the P/E ratio approaches 12.  

But what if the P/E doesn't reach 12? Well, if you are set on buying GE, you can establish an upper limit for a fair value. The 5 year average P/E for GE is 20, but the industry average is 16, so I would say you could use the level of 16 as the upper limit to make sure you buy GE at a fair to discounted value. If the P/E ratio starts going up, you can make sure to buy before it reaches 16. So you see, it's not calculus after all.  

One last thing before you pull the trigger though. Try to get to know the companies you buy as much as you can. What are its products? Who are the main management personnel? How much business does it do overseas? What have been its growth rates in the past? What are the company's business strategies going forward? I've touched some on the importance of this research in previous posts. Again, all this info can be found on the web. Essentially, I want to make sure you have a good grip on the companies before you buy them.  

Alright, so the moment has arrived for you to set up your portfolio. However, it's not as simple as setting it up and then holding onto to it for a long time. In the next post, I'll go over how to MAINTAIN your portfolio. Til then, make you make some moolah!

Best Investment Part 3

Alright, you've set up your online brokerage account, and you've put in $2500 that you've saved.  How do you decide what to buy?  This can be daunting, given that there are thousands of stocks to choose from.  Let's establish some ground rules to see if we can narrow this decision process down.  

 

1) Only look at companies that are profitable.  Ultimately, the stock price is a reflection of how a company is performing, which means how much money they are making.  If a company has a positive cash flow, then they have the capability to grow, and that translates into a higher stock price.  There are some companies with negative cash flows that have growth potential as well, but it is hard to value such companies, because there is much uncertainty about when and how much their potential is.  Especially when you have a myriad of profitable companies to choose from, you don't need this additional risk.

 

2) Diversify, diversify, diversify!  OK, I've mentioned this concept already, but what does it exactly mean when it comes to individual stocks?  Does it merely imply that you buy five different companies?  No, because some companies are very similar to each other.  Diversification, when it comes to individual stocks, means that you buy companies in different business sectors.  Some of the more popular sectors are financials, industrials, transportation, technology, energy, healthcare, and retail.  For instance, you don't want to buy Dell Computers and then Hewlett Packard, because they both are in the computer hardware business.  And you don't even want to buy Dell and Microsoft, because even if Microsoft sells software, they are both in the Technology sector. 

 

Another aspect of diversification that people mention these days is investing globally. The concept is that it is a global economy today, and it's important to have investments in other countries besides the United States.  Global diversification became especially a popular strategy in the past few years due to the "emerging markets" of the world, those third world countries that are rapidly becoming economic powers.  The main emerging markets are the so called BRIC countries--Brazil, Russia, India, and China.  To give you some perspective, in 2007 these countries averaged about a 10% GDP growth rate, compared to the USA's 2%.  I would caution you to not get too excited though, because whenever economies grow so fast, they run into the problem of inflation, which is why despite the astronomical growth, the stock markets of Brazil, Russia, India, and China have fallen 20-60% year to date!  Yes, it is important to diversify globally, but don't do it because you hope to capture the huge growth of the emergent markets.  Do it for the sake of diversification, i.e. to protect yourself just in case your US investments don't do well.

In terms of the logistics of investing globally, there is a misperception, in my opinion, that you should go out and buy international companies.  Yes, you are able to do that through several international exchanges these days.  But I argue the better way to go about it is to buy US companies that do a lot of business overseas.  Why?  Because, it is more difficult to research international companies, in order to determine what exactly you are buying.  Stick with the familiar companies at home.  Many USA companies can give you great exposure globally.  Did you know that Hewlett Packard does about 68% of their business overseas, Mastercard 50%, and Caterpillar 60%?  So make sure you research this aspect when your are choosing your stocks.  

 

3) Be wary of stock tips!  It seems like whenever you talk stocks with people, everybody has an opinion of what to buy.  These opinions are great for conversation, but be careful about following stock recommendations.  Always do your own research, and if it comes to the same conclusion, then perhaps you can follow the advice.  Especially be cautious of people who give speculative reasoning.  For instance, don't buy a company because someone thinks it will be bought out by another.  How do they really know that?  If they really do, then it is considered insider trading (i.e. trading with beforehand knowledge of an impending event), which is illegal.  If they are insiders and you follow their advice, then you'd be breaking the law as well.  

Another common speculative tip is that a company has a new technology or product which will do well in the future.  One of the first stocks I bought was a company called Mechanical Technology, which manufactures methanol fuel cells, or essentially methanol batteries.  The reason I bought it was because I read several articles lauding the prominent future of methanol fuel cells in portable devices.  These articles were claiming that methanol fuel cells could potentially increase the battery life of a cell phone by days.  They also cited that companies like Samsung were on the verge of launching such batteries.  This was about 2 years ago, and I haven't yet seen or heard of a single device with methanol fuel cells.  I bought Mechanical Technology at around $10 a share, and it promptly fell 50% in the next 6 months, basically because the company did not make any money.  In fact, I don't think it's ever been profitable...that's how great of a company it is.  

How about stock tips on good companies?  Relevant current examples are, "You should invest in Apple because the Iphone is going to ROCK!"  Or "You should invest in Nike, because of their Olympics exposure."  These statements may be deemed speculations as well.  For all we know, there may be a huge flaw with the Iphone that has not been uncovered.  Likewise, with the ongoing recession, it's unclear even with the Olympics, if people are going to spend money on an expensive pair of Nike shoes.  But the difference here is that we're talking about two great companies that have proven their performance historically.  Good companies usually find a way to sell their products, and even when they have setbacks, they are managed so well that they often recover in an even better position.  So following the recommendations on good companies may not be bad, but be careful of buying them overvalued.  I.e, you still need to go further and decide whether or not the stock price fairly reflects their overall value.  I'll explain how to determine the valuation of a company in my subsequent articles.  Talking about good companies is a good segway into the next rule. 

4) Buy the 'best of breed.'  The best of breed is a phrase used by investors simply to describe the best companies in a certain sector.  These are companies which are usually large companies, which have been around for a long time, have grown consistently and along the same lines, have consistently beaten earnings estimates.  It is easy to determine the best of breeds.  You can probably just google 'best of breed+the business sector' to get an idea.  Most of these companies are ones you are familiar with, e.g. Walmart, General Mills, McDonalds, Goldman-Sachs, etc.  

But don't just go out and buy these companies because they are labeled best of breed.  Remember to do your own research.  Look at the historical data on earnings, growth, and stock price.  When you research this data, also look at how they have met market expectations in the past.  Financial analysts on Wall Street are always coming out with estimates which, taken together, become market consensus estimates.  All this data can be found these days on your brokerage website or other investment websites like Yahoo or Google Finance.  It is important to see how a company's performance matches the market estimates, because it gives you an idea of how well that company is being managed.  A company can have great products, but without a good CEO, CFO, and other management personnel, the company won't be able to grow to their potential.  

The other advantage with best of breeds is that in times of economic downturn, these are the companies that will be able to survive, because they have enough capital to weather the storm, so to speak.  A lot of investors often think these companies are boring, i.e. their stock price goes up very slowly.  But remember that your ultimate goal is to just beat the market, which means greater than 9% return a year in the long run, which best of breeds usually do.  

Ok, so go look at some best of breed companies in the different sectors, but don't pull the trigger yet, because there is a further step of determining their value, which we'll go over in the next post.  

Until next time, make you make some moolah.

Your Best Investment Part 2

Alright, hopefully I've convinced you that investing in the stock market should be essential for beginning professionals. So how do you get started? First, you're going to need some way of purchasing stocks. The best way for individuals these days is to buy them through online brokers. Before Al Gore invented the internet, people who wanted to buy stocks would have to go through actual brokers, which meant a phone call and significant commissions. Now you can purchase a stock yourself instantaneously online, still with trading fees, but not as high. In addition, individual investors these days are able to research the companies they buy via tools online brokerages and other investing sites offer. The internet has truly revolutionized investing in the stock market by making it easier for individuals to follow their investments, which is another reason to get into stocks. Some of the better online brokerages are TDAmeritrade, Scottrade, and Charles Schwab. (I didn't mention E-Trade, because even though that baby in the commercials is damn cute, they are not doing well as a company and may be going bankrupt...not where you want to put your money!)

Before we get started, we have to go over the principle of diversification. I had mentioned it in a few of my earlier posts, and it's quite a simple idea. The more varied your investments are, the less chance you'll be seriously hurt if one of your investments goes sour. We talked about index funds the last time, which are a great way to diversify. Remember also that I recommended your retirement money should just be in index funds. Then you can leave some nonretirement money to invest in individual stocks. Because of the concept of diversification, ideally the more companies you have in your portfolio, the better. But the problem is that you can't have too many stocks, because then it becomes difficult to do the research in order to actively manage them. A good start would be to pick about 5 companies, and then go up as you feel comfortable.

Another consideration before you buy stocks is how much you should buy. Because a broker will charge you a fee each time you buy or sell stocks, it's important to think about how much your total yield would be with each stock purchase. Most online brokers these days will charge you a fee of $10 per transaction, so ideally if you make a profit on your investment, subtract $20 ($10 for the purchase and $10 for the sale). That doesn't seem like a lot, and it's not really significant in the long term, but I bring it up because it factors into the minimum you should put into each company, which is in my opinion, $500, more or less.

How did I come up with $500? It's kind of a personalized number, but the concept here is that when you invest in individual stocks, you need to plan out as much as you can beforehand, especially when to buy and when to sell. You need to have a goal of making a certain yield on each of your investments. The goal I use is 20%. Why? Because I told you before that on average, the stock market gives you a 9% annual return. So you need to pick a number higher than that to make buying individual stocks worth more than just investing in the Dow Jones index. In addition, the best investor in the world, Warren Buffet, has averaged about a 20-25% return. So I pick 20%, and let's say you put $500 into a company. A 20% yield would be $100. Minus the $20 transaction fee and then taxes, it comes out to be around $50, which I feel like is the minimum profit I'd be OK with. That's how I think about it, and you can come up with something different, but the important idea once again is that you need to plan it out beforehand.

So if you were to buy a minimum of 5 stocks in order to diversify your portfolio, and you think my thought process behind the $500 minimum is legit, you would need at least $2500 to get started. This minimum is very important, because a lot of people get caught up with buying "penny stocks," since they can't afford anything else. Penny stocks are cheap because they represent bad companies, ones that often are not profitable and are just pure speculation, which makes penny stocks very risky. Save up the $2500, or whatever minimum you come up with, so that you can invest in GOOD companies.

Not investing in penny stocks ties into the last point of this post--don't use the stock price by itself to decide whether or not to buy. Let's look at an example. Let's say you're choosing between two stocks. One costs $10 per share, and the other $100. If you are going to invest $500, it's easier to lean towards buying the $10 share. But think about it--if both stocks go up, say 5%, it really doesn't matter if you have 50 shares, versus 5. Overall, your yield is $25, 5% of your total. The stock price by itself is really irrelevant (unless it's more than you can afford to put in, but most stocks are under $500). What's more important is how it represents the value of a company. I'll go over how to assess that in the next post.

Until then, make you make some moolah.

It is Time

Of all investment options, the stock market will give you the greatest returns in the long run.  Yes, it's time to talk about the stock market, not only because I feel like doing so as part of the chronology of the blog, but because it is oh so relevant these days.  As we all know, the economy is in a downturn, and the stock market has reflected that in a huge way.  These economic downturns only come about once a decade, and are unprecedented opportunities for investors.  But then you ask, "Why should I buy stocks now, only to see them lose value in the next few months?"  A valid question, and through these next few posts, I actually won't answer it!  Instead, I'll give you a sense of when and how to invest in the stock market in a confident enough way, such that you won't need to ask this question.  

First, let's go over the basics.  What's a stock?  A stock, or "share," is what it inherently means...it's an ownership piece of a public corporation.  Hmm, that's an odd concept...imagine if you started a business, and then decided that you would give up the ownership of your business to a bunch of strangers.  Why would you ever want to do that?  Because yes, you're relinquishing ownership, but also selling it to raise a huge sum of money you can then use to grow the company.  And these people who are buying ownership, these shareholders, usually don't want to run the company, so you still get to do that (as long as they're ok with it).
 

When you flip on the news and they talk about the stock market, they usually refer to the Dow Jones Industrial Index (DJI).  What the heck is that?  Who's Dow Jones?  Well, actually Dow Jones refers to two people, Charles Dow and Edward Jones, two reporters who founded the publishing and financial firm, Dow Jones and Company, in the 19th century.  It was Charles Dow who established the DJI, a weighted average of a group of companies that would accurately reflect the performance of the industrial sector of the stock market.  The DJI since has evolved to capture the stock market as a whole, rather than just the industrial component.  It is important to understand, when you are investing in stocks, that you have the option of putting your money in an index fund, i.e. a fund which follows the performance of an index like the DJI.  This a more conservative way of investing in stocks, because you are more diversified by capturing many companies instead of picking a few. 

 

Other common indices are the Standard and Poor (S&P) 500 and Russell 3000.  To understand them, we have to define the term "market capitalization (market cap)," which is essentially the total value of a company as determined by the market.  The biggest companies are termed, "large cap" companies, and they, give and take, have a market cap of >$5 billion.  Mid cap companies are between $1-5 billion, and small cap ones are <$1 billion roughly.  The S&P 500 index is comprised of 500 of the largest companies, and is supposed to capture the performance of large cap companies as a whole.  Likewise, the Russell 3000 does that for small cap companies.  Standard and Poor and Russell also have indices reflecting mid caps.  Whether to invest in large vs. small cap indices is controversial.  The historical returns have been similar, but personally, I prefer the large cap companies, as they are more well known and easier to research.  If you are investing in individual stocks, large cap is definitely the way to go, at least for beginners.

 

So should you invest in index funds vs. individual stocks?  Most personal finance books would say index funds, because they want to give you the most conservative advice, so that you are not able to sue them if you lose a lot of money on individual stocks.  In my earlier posts, I mentioned that you get about a 9% return over a long term in the stock market.  That is referring to the DJI, and indeed, most average investors do not "beat the market," i.e. make more than a 9% yield investing in individual stocks.  Personally, I don't like to be very risky with my retirement money, so I put it in the DJI.  I would recommend you do the same.  However, you can allocate a portion of your non-retirement money for investing in individual stocks.  This portion of your non-retirement money has to be money you are willing to lose, because that definitely can be a possibility when you are dealing with individual stocks.  However, the probability of losing everything becomes very minimal, if you do your research and invest correctly, and often times, you will beat the market.  It is more rewarding as well, because you are actively managing your portfolio, rather than just passively following the stock market. 

 

Let's define one more term and call it a day.  The stock price is obviously what you pay for a share of the company.  Well, how does that get determined?  The stock price, if you think about, is basically the market cap divided by the number of shares of the company.  If a company is worth $100 (e.g. my lemonade stand when I was a kid) and there are 100 shares, the stock price would be $1.  Understanding this is important, because then you realize that the stock price is not just affected by how well the company does, but is also dependent on movements in the number of outstanding shares.  Sometimes a company, in order to raise additional capital, will put more shares in the market.  This is called a secondary offering, and it almost always results in a decrease of the stock price, because the market cap is being "diluted" with more shares.  Vice versa, if a company buys back stock, termed a share repurchase or share buyback, that usually results in an increase of the stock price, as there are less shares available.
 

Alright, that's enough for this post.  Til next time, may you make some moolah.

In Case Sh%$^

One of my favorite stand up acts of all time is Chris Rock's "Bigger and Blacker." In one of the segments, he talks about insurance, or what he terms, "In Case Sh%^&" He says, "I give a company some money in case sh*%& happens....Now if sh&%* don't happen, shouldn't I get my money back?" Yes, Chris, from a moral standpoint you should. But in terms of business, if you got your money back, there would be no insurance company in the first place. Insurance is an interesting concept, brilliant actually. Insurance companies play the odds. Basically, they charge their clients premiums (periodic sums of money), aggregate them to decrease risk, and then use the pot of money to compensate situations in case sh*%&^. Most of the time nothing happens, and that's how insurance companies profit. As a starting professional, how should you approach insurance?

Now you can insure anything...that's right, if you wanted to purchase insurance for your right little toe, you could do it. So the question is, should you? I don't care how much you value your toe...the answer is, NOOOO. Do not insure your toe. Why? Because even if you lose it, you'll be fine...unless you're a foot model, in which case you have other issues. So the principle here is, only insure those things that are significant to you, and in personal finance, that translates into things which could potentially devastate you financially if they were damaged or lost. Maybe you've heard this already, but how is it different for a starting professional?

Well, for most people, when they are starting out, they don't have much in assets. Remember we talked about the fact that human capital is far more abundant than financial capital in the beginning. So the number one thing to insure for starting professionals is health. Most people don't realize how important health is when it comes to finances. I'm not just biased because I'm a doctor, but if you came down with a serious illness, it would not only impede your capability of making money, but healthcare these days is ridiculously expensive. As doctors, we write prescriptions every day, incognizant of how much they cost. But when I started a small clinic last year and actually had to buy medicine to stock my office, I realized just how expensive they were. Also, did you know that the average cost of a day in the hospital is in the thousands? So it is important to take care of yourself--to eat, sleep well, and exercise, so that you can prevent illness. And it's important to have health insurance.

Some people may say, why do you need health insurance when you're young? Yes, it's true that insurance is more important as you age, because the chance of getting sick increases. But remember, all it takes is one car accident or one obstruction of your appendix to land you in a hospital, and if you had no insurance, that's thousands of dollars a day leaving your bank account. That would be considered a financially devastating situation for most starting professionals. In terms of what type of plan you should purchase, for most insurance plans, the more extra benefits they cover, the higher the premium. For instance, most plans cover hospital stays, but if you wanted a plan to cover regular office visits or prescriptions, the premium would be higher. To start, choose a plan which is weighted more on covering hospital stays, and these conveniently are the cheapest in terms of the premium. Because you don't want to give the insurance company more money to cover office visits, when you are only going one or two times a year to the doctor. And even if, for some reason, you were sick more than usual and had to go ten times a year, that would not ruin you financially.

When we talk about insurance, we need to talk about deductibles as well. A deductible is an amount that you agree to pay before the insurance plan kicks in. For instance, if you were admitted to a hospital, and your hospital deductible is $1000, the hospital expenses would have to reach $1000, before your insurance company starts paying the bill. The deductible affects the premium such that lower deductibles usually mean higher premiums. When deciding on a deductible, again think about how much you can potentially afford to pay and not devastate yourself financially.

Ok, so what else should you cover?...no, we're not insuring the other toe... Probably the only other important asset most starting professionals have is their car. Not to mention that it is the law in most states, but yes, everyone should have auto insurance. For cars, you pay a premium for an agreed-on maximum amount the insurance company will pay for an accident. There are a bagillion different types of auto insurance, so I would recommend you discuss it fully with your insurance agent, but try to get as much as you can afford, the minimum being comprehensive, liability, and collision coverage.

What about life insurance? That sounds like a good idea, right? What's more important than your life? As far as most beginning professionals are concerned, the answer is NOOO. "The answer is NOOOO!"--that should've been the title of this post. Life insurance is only practical if you have dependents, people like your children whose lives rely on your income. Now, there will be insurance agents who will try to sell you a variable policy, which is one in which they invest your money for you. They will tell you that in 40 years when you pass away, your money will have grown and your children then can benefit from the policy payout. I'm sorry, but 40 years is a long time to accurately predict what your situation will be. Even if you're a hundred percent sure you're going to have kids, how do you know they will be dependent on you? How do you even know you'll live that long? God forbid, but what if you die next week? And why do you need an insurance policy to invest your money, when you can do it on your own? The answer is NOOOOO!

One last example. Let's go back to our TV shopping experience. When you are paying for the TV, the salesman tells you about an insurance plan, that for an extra two hundred dollars, extends the existing warranty by 3 years. That happens all the time, right? By now, you know what the answer is. Don't think about how much more than $200 it may take to fix or replace the TV, but instead, ask yourself if that is going to cripple your finances, and usually the answer's NOOOO.

I feel like I made a lot of friends with insurance agents with this post. Anyway, until next time, may you make some moolah.

Gas X

Alright, I'm going to diverge somewhat from core personal finance issues in this post and devote it to our other big problem in the economy besides the credit crisis--President Bush...oops, I mean the oil crisis.  I figure I should talk about it before gas prices plummet, and yes they will...sooner than you think.  Don't worry, I'm not going to subject you to a long rant about whether the high price of oil is due to speculation or supply and demand.  It seems like everybody has an opinion, and who knows who's right.  I'll just leave it with the observation that in our last oil crisis, we had long lines at gas stations due to a TRUE lack of supply, and it's hard to believe demand in the last 6 months increased parabolically.  Anyway, let's take a look at how one can productively deal with the problem of high gas prices.  I'll talk about ways to save on gas, increase the gas efficiency of your car, and even potentially profit from this whole oil mess.  

I'm from LA, and if there is one part of the country where gas prices are hurting the most, it's LA.  Los Angelans luuuvvvv their cars.  This is the place where people drive 2 blocks to the supermarket, where we have a total of 4 subway lines, and where we possessively refer to our freeways as "the 5, the 405, the...."  OK, I may have been guilty of some of these qualities...but at least I'm passed the stage of denial.  Anyway, for Los Angelans you can imagine that gas is a major expense.  It's easy to tell people to take public transportation instead of driving.  Really?  That saves you gas?  Let's think beyond that, and if for some reason you can't escape driving, here are some ways to lessen the financial pain.

My first tip is to consolidate your driving.  Every time you take your car out, think of how you can accomplish all your outstanding errands in one spin.  On your way back from work, if you drive past the supermarket, take that as a chance to do your grocery shopping.  But make sure that your stops are on the way.  You won't be saving gas if you're going off your way, even if you do everything in one trip.  Fortunately, I've been adhering to this tip even before this oil crisis.  I live in an apartment with a small garage, and getting in and out of it is not the most convenient.  Maybe the tip should really be to find an apartment with a tiny, overcrowded garage.

Tip number two is...have you noticed all those credit cards that give you gas benefits?  All you have to do is google 'gas credit cards,' and there are multiple web sites that direct you on how to get a credit card which can give you gas rebates.  As with any credit card, you want to make sure you read the fine print, and avoid silly things like annual fees, ridiculous interest rates (not that you're going to miss your payments), and certain other restrictions like you can only use the card at specific gas stations.  

Tip number three and probably the most important--be a gas efficient driver.  Now there is a slew of ways to do this, but the bottom line is try not to be Jeff Gordon.  If you don't know who he is, that's ok...I don't understand the appeal of car racing either.  On most cars, there is a gauge that tells you how many RPMs (revolutions per minute) your engine is doing.  The idea is to keep the RPMs to a minimum, and the ways to do that are to 1) Drive more slowly.  Unlike most people, you can actually obey the law, and drive the speed limit.  2) Don't accelerate rapidly.  Avoid cutting in front of other drivers or stepping fully on the throttle when accelerating.  And 3) If you have a manual transmission, to upshift quickly.  Being in a higher gear results in less RPMs.  

Believe it or not, wind drag or resistance makes a difference.  Most people think turning on the air conditioner uses more gas, which is usually true.  But if it's a hot day, having the air conditioner on will actually save you gas on the freeways compared to rolling down your windows.  This is because of the amount of wind resistance you create with the windows open.  

The weight of your car matters as well.  The heavier your car is, the more gas your engine has to consume to move the car.  Hence, it'll help your miles per gallon if you emptied your trunk of unecessary things such as the case of bottled water, the bowling ball, or the suitcase of extra sticks of beef jerky just in case you get stranded in the middle of nowhere.

How about selling your car and getting another more gas efficient one?  That is a calculation you must do for yourself.  If it results in immediate savings, then it's worth it.  I personally don't understand the appeal of SUVs and pick-up trucks anyway.  In a way, high gas prices may serve the beneficial purpose of making us all more energy responsible.  I know I'm not making any friends saying that...especially in LA.  Anyway, but one thing is certain about changing cars--don't go out and buy a hybrid vehicle, because they still cost substantially more, and will take an average of at least 3 years just to recoup your additional cost.  

You've seen some ads for gasoline additives that increase efficiency.  One word--SHAM, don't believe them.  There have been no studies showing that any additives work in that manner, and we don't know yet how they could potentially harm your engine.  Along the same lines, is it worth getting high octane fuel?  High octane fuel does NOT increase gas efficiency, but some studies have shown that it does help with engine performance, e.g horsepower, torque.  Nonetheless, if you have a luxury car that is built for premium gas, to date there have been no conclusive studies showing that regular gas would harm the engine.  In fact, I drive a BMW and when I bought the car, the dealer revealed to me that's he's owned BMWs for a while and he's always bought 89 octane without any noticeable negative effect.  But again, this is anecdotal and you decide what's comfortable for yourself.  

Alright, here comes the juicy part of this post.  How can you actually MAKE money with high gas prices?  The surest way is to invest in alternative fuels.  We don't know if there really is a supply and demand issue with oil, but we know that the concern for energy has come to the forefront, and it is a certainty that we'll eventually run out of oil.  When that happens, we will have to depend on something else, and the usual suspects these days are natural gas, wind, and solar energy.  

There is also ethanol, coal, and nuclear power, but these for various reasons are not as attractive.  Can you really imagine shoveling coal in your car?...enough said about coal.  Regarding ethanol, it's a very controversial issue, but the bottom line is it's not as efficient to produce as the first alternatives I mentioned.  Lastly, nuclear energy still scares the sh*%^ out of people, so that's not coming along anytime soon. 

Natural gas is probably the best prospect to replace oil, as there is an abundance of it, especially in the US, and it is the cleanest burning fossil fuel.  Wind and solar though should play signficant roles.  The Department of Energy forecasts that by 2030, wind power should contribute about 30% to the country's energy needs.  So how do you invest in these alternative fuels?  For natural gas, you can invest in the fuel directly, by buying the US natural gas fund, symbol UNG.  Another way is to invest in natural gas companies, a few of the good ones being Chesapeake, XTO, Apache, and Anadarko.  In terms of wind, there is an exchange traded fund (ETF--we'll talk more about these funds later in my stock market posts) with symbol FAN, representing a pool of wind companies all around the world.  There is no public company that purely specializes in wind power, but a few who have substantial exposure are Trinity, Kaydon, and Owens Corning.  To invest in solar, there are only two companies worth looking at, which are First Solar and Energy Conversion Devices.  They are the only two companies that specialize in thin solar films, which is the best in solar technology these days.  Be aware that all these investments are for the long term, probably at least 5-10 years, as it will take time for these alternative fuels to emerge.

Waiting 10 years to make money doesn't sound too sexy, right?  Well, if you are more risk averse, an option would be to bet that oil prices will indeed fall and there are several ways to play that.  There is an ETF with symbol DUG that inversely correlates to how well the major oil companies do.  A better way may be to invest in oil refining companies, the best being Valero.  High oil prices are usually harmful to the oil refiners because that cuts into their profit margins.  As a result, refiner stocks have done very poorly in the last year, but when oil prices decline, they should be one of the best beneficiaries.  

Wow, that's a lot of gas in one post!  I'm gonna go and get myself a bean burrito now.  Until next time, may you make some moolah.