How Much Should I Put Down?

The other day I was talking to a friend about down payments on mortgages. He wanted to know whether I thought 10 or 20% was the ideal amount to put down as mortgage payments.

A couple other people who feel 20% is the ideal amount got into the conversation. Turns out some people actually believe you should put down as much as possible even if it means 50%.

I approach a home very differently, based on age and future plans.

I'm of the opinion that my friend who is young and has no family should only put down 10% and look for other places to invest the remaining 10% as long as it doesn't adversely affect his interest rate and he won't pay PMI.

I've never seen a home as much of an investment for a couple of reasons:

1. Unlike other actual investments like a CD, stock markets funds, etc, a home actually becomes a burden financially should things turn worse economically, say a job loss.

2. You cannot tap into it without, a) either having to dispose of it, which is not easy, since it's one of the most illiquid "investments", b)acquiring debt either through additional mortgage or home equity line of credit.

For me these issues weigh heavily in considering a home as an investment. Mind you, this all pertains to a house you plan to live in.

For younger buyers, I would rather they buy something reasonable in a good area, even if they can afford "more house", and place 10% down.

The rest of the funds should go into more liquid, but restrictive investments, not a savings account you have easy access to with the next ATM. Think of the money the same way you would think of a 30 year mortgage. For the long term with high yield, say an ETF, mutual fund if you're not good with picking and sticking with great companies' stocks.

This way, your money keeps growing, usually faster than the value of your house will grow, you have access to it should things turn out for the worse, you can easily use it to tap into great money making ventures or ideas without putting your home at risk, and so on.
In the meantime, just consider your tax credit on your house as offsetting the taxes on dividends if any.

If you have the means, pay more on your mortgage every month. That way, you still have the effect of putting more money down by reducing your interest going forward.

Of course, this all changes if we are talking about an older person, settled with a wife and kids, who knows they'll be living in the same house for years and years to come and has more disposable income.

Chicos Provides Long Term Opportunity

I have had Chicos Fashion (CHS) on my radar for a while now and I like where it is.
This is a growing company, no debt and great cash flow.
At its current price of $7.30/share, I consider it as being on sale and wouldn't hesitate to start acquiring shares.

The company has closed an underperfoming business purchase and is reviving and expanding existing stores as well as closing underperforming stores.
It runs the Chicos, White House Black Market and Soma chains, all popular with their demographics.

It has been severely battered along with other retailers even though its demographic is less affected by an economic downturn and is now selling at a discount of more than 30% of its intrinsic value in my opinion.
Insiders are also buying in good measure, which is a more positive sign and carries more weight in terms of what insiders believe about a company's future compared to their selling.

Update on PRAA

For those of you who have done research on PRAA and like the company and are familiar with it's debt collection practices and find those practices ethical, now will be a good time to start buying.

Please do not just jump in at once like. We may be wrong about market direction, don't let over-confidence creep in.

I have looked at PRAA's financial statements, and I don't see signs that they prey on bankruptcy victims, (Scroll down and read previous post for better understanding) but make sure your conscience won't bug you every time you read about the company if you are going to buy it. That's something you know for yourself.
This is about making money, but I love to enjoy it too and not feel guilty doing it :)

Having said that, I do have to also let you know that at the current price of around $39/share, this is the cheapest I have seen PRAA based on various valuations.

Note too that debt collections may be harder for them going forward so it may take time for them to realize the full value of debts they buy now meaning, we may not see great news that propels the stock forward for a few months or longer.

Management is however showing faith in the business by buying huge amounts of debt and also believe the debts they are buying are much more fairly priced due to market and economic conditions. If they are right, shareholders will reap good returns down the line.

Going by what I see, I am comfortable holding some PRAA stock right now and buying more if it goes down.

Have fun.

VOLCOM
Here is another company I like now and would buy at current price: VOLCOM (VLCM)

Volcom is a designer, marketer and distributor of young men's and women's clothing, accessories and related products. The Company's clothing, which includes t-shirts, fleece, bottoms, tops, jackets, boardshorts, denim and outerwear, combines fashion, functionality and athletic performance. During the year ended December 31, 2006, the Company launched new product extensions to complement its product offerings. These new product extensions include a complete line of sandals and slip-on footwear, branded Creedlers; a complete collection of kids clothing for young boys ages 4 to 7 years, and a girl’s swimwear line. The Creedlers and kids line began shipping in December 2006. The Company has four primary product categories: mens, girls, boys and snow.

Other than the underlying strong financials it posseses -- good returns on invested capital, return on equity and return on assets, low debt etc. It also has a shareholder friendly management. And the snow division is poised to grow as the season comes around. Volcom is also positioning itself when with younger crowds and has a loyal following, but we also know how fickle this demographic can be.

Going forward, I expect Volcom to be trading at around $59-$60 in 3 years, giving a return of about 30% annually from the current $25/share price.
That is factoring in a slight drop in profit margins to about 13% from the current 16% due to increased competition. I also expect share dilution of about 2%.

The current price allows us enough risk margin to invest. Just remember, this can be a volatile stock, be ready for ups and downs and when it looks like it's shot up too far, take some profit.

Do your own research, get to know the company, but I like what I see.

STARBUCKS UPDATE

Starbucks released their numbers. I like it. It's still a growing company with great margins and people still love the product even with the increase in price.

The stock is dropping because traffic fell in the U.S. Well, we all so that coming witht he current state of the economy. The 1 percent drop in traffic at stores open at least 13 months marked the first time the company has seen such a decline.

But the drop in traffic was upset by a 5 percent increase in transaction value. Traffic is still growing outside the U.S.

Go here for details.

Like I said, the drop in stock price only presents a buying opportunity. The company is growing. The current economic downturn will ease as the housing woes die down.
Buy as the stock price drops towards the lower end of our $20-$25 range.

It may go lower than $20, so don't commit all your funds at once.

BUYING STOCKS

The market decline has provided some opportunities. Now, it's time to talk about buying. I have recommended First Marblehead (FMD) in a previous post and Starbucks (SBUX) is also getting into a much more comfortable buying range.

Side note: On Starbucks, note that domestic growth is slowing and the market is somewhat saturated, so seek to buy at the lower end of the $20-$25 buy range or even lower (read my previous post on Starbucks). If you don't want to wait, this post also helps you.

The question now becomes how do we get in?

I would advise against buying all your positions in one trade. A stock, even when it's a good investment, can continue to decline and the farther down it goes, the deeper the hole you're in. Don't be overconfident in the price of a stock. Be confident in your research and the value of the company and the fact that you have given yourself a good margin of error and that the company is a solid performer with good managers.

Losing on a new investment may not mean much in the long term, but in the short term, it is bad for you psychologically as an investor. Nobody likes losing money and the pain of a lose is much harder on the mind, compared with your ability to maintain a long term perspective. That gets better with time.

So do not pile in at once. Buy some and wait. If it goes up, you are making money, if it goes down, you get to buy more of a great company at a better price. At worse, it goes up so much and you have to find a new place for your cash. Not a bad problem to have, considering the alternative may have been you losing money.

Also, if you understand charts (this post is not going to cover that), now is the time to start looking at them: moving averages, MACD, Stochastic, volumes etc to know when the big money is getting back in. Remember, I only recommend such technical analysis after your buy price has been reached. It can help alleviate the risk of watching your purchase going down.

All the same, you don't need to worry if you don't know about charts, just make sure you ladder your buys.

One more thing. Don't let your commissions become a burden. Commissions put you in the hole off the bat. It makes no sense to spend $7 to buy $100 worth of share. You'll already be in the hole for 7%. Limit commission costs to as little as possible, preferably less than 2%.

And then stop fretting about the gyrations of the market. It's time to focus long term and simply follow the company's fundamentals, not stock price. Sometimes it may lead you to sell, but not usually if you've done the proper work upfront.

A COMPANY I LIKE NOW

Usually we discuss companies on my watch list and I talk about my buy-around price.
This time it's different. I like this company at the current price, a lot. And I envisage holding it for years to come.
The company: First Marblehead (FMD).
It has every thing I want in an investment; increasing revenues -- from $301 million last year first quarter to $375 million -- high profit margins in an industry that continues to experience phenomenal growth: private student loans.

First Marblehead isn't a lender though. It designs, markets, and services loans on behalf of lenders and schools. It also slices those loans into asset classes based on risk ratings using its knowledge of the industry and a proprietary database, and sells the asset-backed securities into the secondary market. Last year, FMD facilitated $4.3 billion in student loans, a 28% increase over the previous year. It continues to generate revenues on the loans by helping the institutions manage the accounts: billing, collections, etc.

The company's stock price has been hammered due to the market's fear for its future. At the current price, if everything the market is afraid of happens, it's still undervalued in my opinion. The problem is that many of the institutions FMD sells asset-backed securities too are facing the current credit crisis.
But this crisis will pass and FMD's market is here to stay. People will continue to seek the benefits of higher education.

If you are ready to think long term beyond the noise of the current credit crises, this is a company that has huge cash on hand -- over $370 million on its balance sheet with very negligible debt. High margins, very high ROE, ROI, ROA.

I believe it is worth more than double the current $33.49/share it is selling for. That's a huge discount for a great company. It may be a volatile stock, but I also believe it's one you should have in your portfolio for the foreseeable future. Do your own research, read the annual report and see if it's something you want to own -- long term.

HORROR DEBT

Before you invest in Portfolio Recovery Associates (PRAA). Please read this Businessweek Article.

http://www.businessweek.com/magazine/content/07_46/b4058001.htm

This underscores why it's so important to learn as much about companies before investing.
I personally would not be comfortable with PRAA unless I can get reassurances they don't engage in the shady practices discussed in the article.