Archives for February 2010

While reading the comments on one of J.D.’s recent posts, I got the distinct impression that many of his readers (and likely mine as well) aren’t yet familiar with the concept of affiliate links or how to spot them.

That’s unfortunate. It means that many savers/investors are being exposed to a significant conflict of interests of which they’re more or less unaware.

Here’s the skinny: Affiliate links are links that allow a blogger to receive a commission when somebody clicks the link and buys (or in the case of bank accounts, signs up for) the linked-to product or service. This is important for people to know because:

• Some banks and brokerage firms offer affiliate programs, while others do not, and
• The size of the commission varies considerably from bank to bank or from brokerage firm to brokerage firm.

End result: There’s a conflict of interests between us (the bloggers) and you (the readers). We benefit–in a short-term way at least–when we get you to sign up for the best-paying products and services. You benefit when you sign up for the best products and services.

Be Wary of Review Posts

This blog has roughly 900 subscribers at the moment. If I wrote a post reviewing Ally Bank’s money market account (which I really do use, and really do like), it’s likely that a person or two would sign up (at $40 commission each). What’s relevant here though is that the better I do at selling you an Ally money market account rather than just reviewing Ally’s money market, the more money I make.

Further, if the article ended up ranking near the top of Google search results for “Ally Bank money market” or “Ally Bank review,” the article could turn into an ongoing source of revenue for my business. (And again, the better job I do of selling Ally Bank, the greater the ongoing revenue I’d receive.)

To be clear: This isn’t to say that all review posts are crammed full of lies. I don’t believe that to be the case at all. But when you encounter a review post online, you should know that the blogger likely benefits if you buy the product or service being reviewed.

Common Affiliate Programs

In the personal finance realm, there are several affiliate programs. Some of the more popular ones include:

• Brokerage firms: Betterment, Scottrade, Zecco, TradeKing, TradeMonster, ShareBuilder, OptionsHouse, optionsXpress, and E*Trade
• Banks: Ally Bank, ING Direct, EverBank, WT Direct, and HSBC Direct
• Credit cards: Too many to list!
• Lending Club
• Turbo Tax

This is not to say that the above companies are bad companies or that those of us who write about them are dishonest. But it’s no coincidence that you see so many more Lending Club and ING review posts than Bank of America review posts.

How to Spot an Affiliate Link

There are generally three ways to spot an affiliate link, and they all involve checking the url to which the link points. (This can be done by mousing over the link and looking in the bottom left of your browser window.) The things to look for are:

1. An affiliate tag at the end of the url,
2. A completely gibberish url, or
3. An internal link to a redirect file (usually located in a “go” or “redirect” directory).

Example links with a tag at the end of the url:

• This is the hosting company I used to use. (The “304644” tells Dreamhost that I’m the one who sent you.)
• You should buy this book! (The “tag=obliviousinve-20” tells Amazon that I’m the one who sent you.)

Example link with gibberish url:

• I do not have a savings account with this company. (An affiliate link to ING Direct.)

Example link pointing to a redirect file:

• Free online personal finance software. (This would redirect you to one of those gibberish urls, which would in turn send you to Mint.com.)

Any Questions?

From a business perspective, affiliate programs are here to stay. They’re profitable for both the linked-to businesses and for the bloggers promoting them. (About 8% of my own income is from affiliate programs.)

But it’s important that you understand how they work and how they can influence (whether consciously or not) the way in which bloggers describe a product/service.

This is a guest post from Mr Credit Card of www.askmrcreditcard.com.

Most people I know who do their own investing–as opposed to sticking with index funds or ETFs–use technical analysis or simply do some basic research, assume some growth rate, and compare PE ratios. But investing is a lot more complicated than that. There are many more things that DIY investors should look out for.

Look at absolute P/Es.

I remember back in the late 90s when I was reading research reports on the internet by various brokerages. It was pretty interest reading at that time but even more hilarious when I look back. One of the recurring themes back then was how high PE ratios were. In fact, I read a report listing all existing and forward-looking PEs. The internet firms listed on NASDAQ had triple digit PEs and even folks like Cisco had 70 PE. But they all still justified buying Cisco because, compared to other stuff like Yahoo and AOL, Cisco looked cheap!!

Understand macroeconomics.

Most investors (whether professionals or individuals) focus on a successful strategy that has worked for them–whether it’s technical trading, credit arbitrage, convertible arbitrage, capital structure arbitrage, or options volatility trading. Very often, folks who are really skilled in these strategies can be successful for long periods of time. However, the occasional black swan event (like those in 2008), can result in a terrible loss of capital. I find that many folks who specialize in specific strategies do not dwell too much on macro economics–unfortunate given that many strategies are dependent upon the macroeconomic environment.

Understand the whole capital structure.

Many investors–especially amateur investors–only know about PE ratios and other equity-related things. But very often, the debt market (especially the credit default swaps market) is a better leading indicator about a company. Understanding bank debt is also important in understanding potential cash flow issues.

Learn how private equity investors value a company.

It is also vitally important to understand the backstop bid from private equity investors. Private equity investors rarely invest in 40 PE stocks. Most are essentially deep value investors. Understanding how they look at balance sheets is a great way of figuring out entry levels and takeover bids. This is also a good exercise in understanding balance sheets.

Understand breakup value.

Understanding breakup value is a great skill to have. If a company is liquidated today, how much will it fetch net of debt? Calculating this is vital because sometimes, the markets will misprice a security to below its breakup value. For example, a company may have a higher breakup value than what is on the balance sheet if its real estate holdings are valued at cost. But a retailer’s breakup value is probably overstated in the balance sheet because at liquidation, its inventory has to be sold at massive discounts.

Learn about the chapter 11 process.

Understanding the chapter 11 process and whether a company is at risk of filing for bankruptcy is a great skill to have. This is where (as I mentioned earlier), understanding the capital structure and its debt obligation is so important. If you understand the chapter 11 process, investing in distressed debt can be potentially very profitable. But even if you don’t, it will give you a heads up over folks who just read equity research.

Understand a company’s product.

Sometimes, I find that this is the best way to get a sense of where a company is heading. Given that I review credit cards, in hindsight, I could see which credit card issuers were doing smart things and which were not. For example, I could tell that Discover Credit Cards and American Express knew what they were doing–they did not offer the most generous rewards. For example, in the cash back credit cards area, Amex imposed a tier for their Blue Cash card, and so did Discover. Meanwhile, Chase was simply copying Citibank and copying their reward formula. When the good times ended, they had to embarrassingly reduce their cash rebates and pissed off many folks. Clearly, those products were not profitable. Amex also avoided getting into the ridiculous balance transfer game by not offering the silly 0%-for-15-months deals that essentially ruined Advanta credit cards.

Take Google as another example. As someone who has a website, I’m familiar with their Adwords and Adsense program, which form the bulk of their revenues. I am (and I’m sure many readers are) privy to what is going on in their program, whether it is the introduction of video ads, or whether keywords in certain sectors are getting more expensive. These can all be found on free tools Google offers. Yet, I wonder how many Wall Street analysts have a Google account aside from gmail!

Learn how accounting is done.

If balance sheets were all there is to investments, everyone would be like Warren Buffet. But there is more to the number than meets the eye. It’s worthwhile to study accounting matters like FASB option rules and how revenue is recorded. For example, Auto makers used to push sales to dealers and record it as revenue (they might still do that). But that is really not a true measure of end consumer demand.

Learn how to calculate cost of goods sold and calculate depreciation expense among other things. Studying these rules will give you a better understanding of the company you are researching. Learning basic accounting is so important for understanding a balance sheet.

Remember that nothing lasts forever.

The last point I want to make is that nothing lasts forever. I’ve heard countless times how Microsoft is a stock to leave to your grandchildren! If you look at the S&P 500 list in 1950 and compare it to the current one, you will realize that most of the companies in the index decades ago are no longer in the index today. So don’t get fixated on any investments. Even Warren Buffet’s newspaper investments have seen their economic model and viability change because of the internet.

Mike’s note: As regular readers of this blog know, I’m firmly in the “don’t bother picking stocks” camp. That said, I find that it’s worthwhile to consider opposing viewpoints. (If nothing else, it makes for more interesting discussion!) I look forward to hearing your thoughts in the comments.

This is a guest post from Michael, a contributing editor of Dough Roller, a personal finance and investing blog, and Credit Card Offers IQ, a credit card review site.

The debate between private and public education will most likely go on forever. Whether your child comes out of private or public school better prepared for the rest of his/her life will never really be known. In order to find out, you would need to have the same child experience both, which simply isn’t possible.

Public schools provide statistics on how the diversity and larger class sizes teach students to be patient with (and tolerant of) others. Private schools show that smaller class sizes allow teachers to be more interactive with students, that they have better-kept facilities, and that they can fit more material into a school day when they follow their own curriculum rather than the state’s.

I don’t doubt that both schools have their advantages, but is paying for a private school education truly worth the money?

According to a census taken at the end of the school year in 2009, the average private education tuition was $17,441 per year. If you decide to send your child to private school for grades 1-12, you will be spending a total of $209,292 on your child’s pre-college education. If you choose to send them to public school, you spend nada.  Is spending over $200,000 a wise investment for your family and–more importantly–for the child you are spending it on?

My answer is “no, not even close.”

Granted, there are going to be situations where the public schools located in your area are poor or downright unsafe and sending your child to a private school is an excellent decision. But for many parents, I can think of better ways to invest in your family’s future.

If you invested $17,441 a year into a high yield savings account paying 2%, when your child graduates from high school, you will have a total of $240,000 available to pay for college, cars, or anything else you think would help your children out. And if you have a financial advisor you trust, you can probably do much better than that.

Why do I feel this way? It comes down to return on investment.

• Does the $200K ensure that your son or daughter will be better educated? No.
• Does the $200K ensure that your son or daughter will be approved for a top end University? No.

Statistics show that a proportionate number of private and public school students are accepted into quality universities and that private students standardized test scores are only slightly higher than that of public schools. I would argue that private schools show better standardized test scores on average because the living conditions for privately schooled children are better than those of publicly schooled children.

So if there is no guarantee of a better education–or a better shot at college–then what do you get out of your purchase?

• More Control – Parents have little control over a school board’s curriculum in a public school because it comes from the local or state government. Private schools are funded by parents and not by taxes, so parents have a little more control in what they can change (or try to change)
• Better Facilities – There’s no doubt that a private school will have better-kept facilities, more resources and offer more opportunities for students to expand their minds. Whether or not students are receptive to these options is dependent on the student of course.
• Peace of Mind – Just as my mother doesn’t mind spending $90 each year to have her taxes done by a professional, rather than doing them herself, private educations can put a parent’s worries at ease, because they are better maintained and overall safer than public schools.

From personal experience, I can tell you that my public school education taught me a lot about life that I most certainly would not have learned had I been enrolled in private school. Students that work hard and take education seriously can do so in either setting, and who’s to say that private school will actually be the better option?

Whatever decision you choose, make sure you are doing it for the right reasons and everything will work out A-OK.