Last week's question and answer
You want diversification? Look no further. I've made pianos, motorcycles, drums, skis, tape decks, boats, golf clubs, furniture, tennis rackets, computer drives and snowmobiles. I've even owned and run some resorts. In conjunction with the music foundation I established in 1966, I'm spreading musical education throughout the world. I was founded in 1887, when I made reed organs. In 1932 I introduced pipe organs. At that time I was known as Nippon Gakki Co. Ltd. Many of my products sold in America are built in Georgia and Michigan. Some of my new musical instruments are silent. Who am I?
(Answer: Yamaha)
Recalling General Motors
The world's largest automaker, General Motors (NYSE: GM), announced its latest round of vehicle recalls recently -- involving roughly 1.5 million vehicles -- or more than the company's entire sales for the past three months.
To date, in 2004, GM has recalled a staggering 10.5 million vehicles. According to its media relations site, that's more vehicles than the company has sold during the entire past two years. It's true that the sales are still sales; there's just some repair work to be done and then the cars go back to their owners. But still, these are huge numbers.
GM is facing quality control and brand image problems, with a troubling trend emerging: The public perception of GM as a producer of low-quality autos erodes its pricing power. GM, therefore, finds it harder and harder to sell its vehicles at full price, and must resort to cash rebates and other sales incentives to move its products. Meanwhile, competitors with higher-quality images are able to sell their wares at full, or nearly full, price.
This erodes GM's profit margins, bolsters its competitors' profit margins, and weakens GM's ability to compete on either quality or price. At some time not far in the future, GM will no longer be the world's largest automaker. Toyota will add that label to its current title of "world's most profitable" automaker.
Don't be a turkey
When it comes to managing your money, don't be a turkey. Here are some common financial mistakes to avoid:
- Racking up credit card debt. High interest rates increase your debt, making it harder and harder to pay off. That's reverse investing. Learn more and get help at www.fool.com/ccc.
- Not investing soon enough. You're rarely too young or too old to invest. Children have the most to gain from many decades of stock appreciation. Even retirees can benefit from leaving whatever money they won't need for five or 10 years in stocks.
- Investing too conservatively. Any long-term investment is likely to grow most rapidly in stocks over the long term.
- Over- or under-diversifying. If all your eggs are in two or three baskets, you're exposed to too much risk. But if you have too many baskets to count, then you probably aren't able to keep up with each company. Between five and 15 stocks is manageable for most people.
- Focusing inordinately on a stock's price. A "cheap" stock isn't necessarily a bargain. Penny stocks trading for less than $5 each are often risky and dangerous. A $150 stock actually can be a bargain, and if your funds are limited, you always can buy just a few shares.
- Investing in what you don't understand. The more familiar you are with how your company works and how well it's performing, the fewer unpleasant surprises you're likely to encounter.
- Relying on the advice of others. It's great to learn from others, but ultimately you should make your own decisions. You're the one who cares the most about your finances.
- Not tracking your returns. Shrug off this duty at your own peril. In the long run, you always want to be beating a benchmark such as the S&P 500. If you're not beating it, you might as well meet it, by investing in an index fund.
- Impatience. Building great wealth takes time.
Run rate, run
What's a "run rate"? -- L.H., Dothan, Ala.
Imagine that you're studying the financial statements of McDonald Farms (ticker: EIEIO). It's growing very rapidly from quarter to quarter. Perhaps, for some calculation, you need to estimate its current annual level of sales. You could add up the last four quarters' worth, but that would clearly understate sales, as each quarter's numbers have been rising.
You need a run rate. Take the most recent quarter's sales of $30 million (up from $25 million the quarter before and $21 million before that). Multiply that by four, and you'll have the company's current run rate for sales: $120 million. This is not a forecast or a measure of past sales -- it's a reflection of the current level of annual sales.
Bankruptcy is bad news
On our discussion boards at http://boards.fool.com, Paul from San Diego confessed: "My worst investment (so far) has been the energy trading company Mirant. I started buying upon a recommendation from an online 'expert' who didn't happen to own any shares himself. I got in around $25 per share and saw the stock shoot up to over $40 during the California energy crisis. I bought some more. Then the stock filed for bankruptcy protection and now trades for pennies." Paul wondered what happens when a company emerges from bankruptcy proceedings and whether he might make a little more money.
The Fool Responds: Many readers responded, offering excellent advice.
Some noted that when companies emerge, existing shares are often voided. J.D. from Colorado said, "For every day your money is stuck in this 40-cent stock and you are praying that it will go up, you are losing out on the very real chance of making your money work for you in a winner. Do yourself and your money a favor and sell. Put it behind you, chalk it up as a bad trade and a learning experience, and move on."
So true.
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