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Let’s say you were around on VJ day, September 2, 1945, which was the day that Japan formally surrendered at the end of World War II. For the month of September 1945, the Dow Jones Industrial Average was at $180. Sixty years later in September 2005, the DJIA was $4,789. That is an increase of over 2600% over 60 years.

The problem is that the increase in the DJIA was not a straight line; it went up and down the entire time. If you could not wait for 60 years but only had 40 years, the price in September 1985 was $1,329, which is only a bit better than 700% for the four decades. If you only could wait 20 years, the price in September 1965 was $931, which was a bit better than a 500% increase.

How does this compare to interest earned in a bank? If you put $180 into a bank account and it earns 8.22% compounded daily for 20 years, then you will have about $931 (the same value as the DJIA that year). For 40 years, the $180 invested at 5% would result in your $1,329. The 60 year mark would turn your $180 into $4792 at 5.47%. This shows that the timing of your buying and selling can have a dramatic impact on the return of that investment.

“Buy and hold” may be good, but it does not necessarily mean that the longer you hold your investment, the wealthier you will become! This is due to the erratic nature of the stock market. You need a system that can maximize the return during the peaks and minimize the risk on the valleys. Five to eight percent returns seem quite small, especially for something as high-risk as the stock market.

Five to eight percent returns are probably adequate for a bank, but this is not a safe, FDIC-insured bank. This is a highly-volatile holding that can decline in value quite rapidly. Conservative banks can pay a lower interest rate because the saver can be assured that the rate of return is safe. In the stock market, your only stability comes from your understanding of what is happening to your investment.

You need a system that allows you to evaluate companies, buy into those companies that are good investments, and then transfer that money to other companies when the investment is better elsewhere. That system is described in my book, The Confident Investor. You can purchase my book wherever books are sold such as Amazon, Barnes and Noble, and Books A Million. It is available in ebook formats for Nook, Kindle, and iPad.

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If you are trying to build your net worth by investing, then you need to worry about how much you spend on a daily basis. To quote Benjamin Franklin, “A penny saved is a penny earned” (yes, I know that it is not very likely that Mr. Franklin coined that phrase). By not over-spending you will have more money to put into your investments which allow your net worth to increase dramatically.

An article by Free WordPress Lessons caught my eye and you may want to jump over and take a look. They have many ideas to save money and they are in the following categories:

  1. Getting cash back on online purchases
  2. Daily deal sites
  3. Coupon sites
  4. Getting rid of cable TV
  5. Deal aggregation sites
  6. Price comparison sites
  7. Saving money on travel
  8. Auction & classified ad sites
  9. Budgeting / saving money / coupon blogs

Under each category are many links and descriptions. I can almost guarantee that you will find a site that you didn’t know about (I found several). It is definitely worth your time to jump over and read the article if you are concerned about getting the most value out of your dollar and increasing your savings.

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I frequently get questioned about how to account for stock buy backs and dividends when analyzing a company. I am going to save dividends for another article and just concentrate on stock buy backs. I will start this discussion with a great quote from Dr. William Lazonick of University of Massachusetts:

“Here we have all these companies obsessed, basically with keeping their stock prices up, and saying the best thing that they can do with their money is spend billions of dollars on stock. And my view of that is, any company that says that they have nothing to better do with their money, the CEO should be fired.”

While many will say that this is an extremely strong statement, I believe that Dr Lazonick is not that far off from the truth.

There are many ways that companies can use their cash that helps the long-term success of the company. Among these are:

  • R&D for new products – This helps the company have a competitive advantage in its market in the future.
  • Increased pay and benefits for employees – While we don’t want our companies to give foolish salaries we do need them to have happy employees that are loyal to the company’s success. In nearly every company – turnover is expensive.
  • Invest in the infrastructure of making their products – Apple [stckqut]AAPL[/stckqut] has made a science of this technique. It regularly helps its suppliers with acquiring the manufacturing tools required to produce great products.  Apple also will commit to large orders and effectively buy up the supply of emerging technology.
  • Acquire new products and technology through mergers and acquisitions – Effectively, the more cash on hand a company has, the more flexibility the company has in doing deals that can dramatically accelerate new products and new markets.

If we re-examine Dr. Lazonick’s quote, it now begins to make sense. A stock buy back plan basically means the company has run out of ways to effectively invest in the long-term prospects of the company. Rather, it is trying to shore up its stock price in the short term. Is this in the best interest of its shareholders or just the stock options of the executive committee?

Many times this shoring up doesn’t even work that well.  According to Fortuna Advisors: “…research shows high return companies create the most value for shareholders when they deploy more capital in growing their operations rather than giving it back to shareholders.”

Recently, the Wall Street Journal pointed out that many times the buy back programs don’t even change the amount of stock outstanding. It seems that it is not uncommon that the buy back is offset by stock grants to favored employees.

I hope that you listen to the quarterly comments of the CEO of each of your holdings. When you are listening to those comments and he or she discusses stock buybacks as a way to boost value to the shareholder, you should be actually hearing, “We have a lot of money burning a hole in our pocket and we are not smart enough to profitably use it, so we are doing a stock buy back!” Or, maybe the CEO is saying, “I dare you to fire me based on the advice of Dr. Lazonick!”

The goal of my book, The Confident Investor, and this site, is to help you find great companies and then grow your investment in those companies by using other people’s money (GOPM). I don’t pay attention to the buy back announcements of companies. I assume they are doing the buy back simply because it is the popular thing to do. I refuse to reward them for this activity but I am pragmatic enough to not penalize them.

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CNN Money recently ran an interesting article on the drop in Apple’s [stckqut]AAPL[/stckqut] share price. It is probably no secret to my readers that Apple’s share price has dropped fairly dramatically in the last several weeks.

In the article, Philip Elmer-DeWitt (the author) quotes 5 different investment pros and then finally each pro puts out a prediction for the price of Apple’s stock.

  • RBC Capital’s Amit Daryanani: Sticking with $750 price target.
  • Barclays’ Ben Reitzes:  Price target unchanged at $800.
  • CLSA’s Avi Silver: Poised To Rebound. $770 price target.
  • Piper Jaffray’s Gene Munster: Comfortable With FY13 Margin Assumptions. Reiterating $900 price target.
  • Avondale Partners’ John Bright: Initiating coverage with $600 price target.

I am also reiterating my commitment to Apple as soon as the bottom is found and the price starts to rise again. Why pay more if the price is dropping short term? I think Apple is probably a buy up to $820.

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John Snow is a former Secretary of the Treasury. Anyone who has had that job is a far better predictor of the economy and how it will affect your personal portfolio than just about any writer.  Mr. Snow recently wrote an opinion in the Wall Street Journal about the affect of future taxes on the economy and the stock market.  His opinion is entitled “‘Taxmaggedon’ Is a Real Threat” and it is very enlightening.

I won’t reproduce the entire article here but I thought that these 4 points were worth repeating. These four points are his advice to policy makers and are reproduced from his commentary.

  1. First, remember the principle that you always get less of anything you tax. For this reason, society discourages undesirable activities by imposing so-called "sin" taxes. By the same token, high marginal tax rates discourage work, risk-taking and capital formation.
  2. Second, tax rates should be held as low as possible, consistent with maintaining fiscal balance. Low tax rates are not in conflict with fiscal sanity if the rate of government spending as a fraction of gross domestic product is reduced, or if the tax base is broadened with more fundamental tax reforms. It is encouraging to see so much interest gathering in support of changes to the tax code that would scrap many special tax breaks in favor of deeply lower marginal tax rates.
  3. Third, marginal tax rates should be as neutral as possible across different types of economic activities. Otherwise the tax code distorts behavior in ways that sap economic strength, as market participants rely less on market price signals and more on government commands to decide how economic resources are used. Social engineering through the tax code comes at a very high cost.
  4. Finally, policy makers should remember to "do no harm." A reversion to the kind of drastically higher marginal tax rates that existed in the past would be bad enough. It would only add insult to injury to use the economic crisis as an excuse to raise the tax burden on capital formation and thus reduce the lifeblood of America’s job creators.

It is my belief as a Confident Investor that whenever things change dramatically, the repercussions are difficult to predict. It is like dropping a rock into the smooth surface of a puddle. You know that there are going to be ripples but you really don’t know all of the splashing that is going to occur and what else is going to get wet.

If tax law significantly changes, you should be cautious with your principal and perhaps hoard more cash for the short term. You can always start to invest again when the market stabilizes and the ripples are gone.