ASK THE FOOL
Rent or Buy?
Q: Is it smart to rent and not buy a house if I plan to move within a few years? - P.G., Pueblo, Colo.
A: In general, yes. If you buy a house and then sell it within two to three years, you may not recoup the buying and selling costs (typically totaling more than 6 percent of a home's value). In many regions, home prices have risen so much lately that some cooling-off is expected.
In the first years of a traditional mortgage, your payments go mainly toward interest, not toward paying off the principal. After living in the house for only a few years, you'll still owe the majority of the loan. (Plus, you'll have paid for repairs, property taxes, etc.)
Renting is always worth considering. It's true that mortgage interest is tax-deductible. But if you're renting a place for considerably less than you'd have to cough up in mortgage payments, you might invest the difference and watch a nest egg grow. If you expect prices to fall or stagnate in the coming years, renting might be prudent.
Q: Why would a company have a projected price-to-earnings (P/E) ratio much lower than its current P/E? - R.B., Springfield, Mo.
A: Rapid earnings growth is likely expected. Imagine that Gas Prices Inc. (ticker: ARMLEG) trades for $30 per share and has $1 per share in annual earnings. Its P/E is 30 (30 divided by 1 is 30). If it's expected to earn $3 per share next year, its projected P/E for that year is 10 (30 divided by 3 is 10).
Love and Money
First comes love, then comes marriage, then come a bunch of financial issues to deal with together for the rest of your lives. Here are some tips for twosomes:
â Communicate. Share your feelings, experiences, hopes and dreams, whether positive or negative.
â Initiate. Become the leader in developing a healthy investing plan for your family. Don't count on your partner to bring up the subject, or you may never begin.
â Educate. Be a sponge and keep absorbing. Share as much knowledge as your spouse is willing to hear. Fess up to errors, explaining what you learned from them. Forgive each other for inevitable missed investing opportunities, such as buying too late or selling too soon.
â Invigorate. The more fun you can make investing, the more receptive your partner will be. Sharing your vision of a brighter future may help it happen, and your excitement will be contagious.
â Deliberate. Discuss issues and decisions carefully. You're not always going to agree, so determine what is and isn't important. If a disagreement is not reconcilable, consider establishing separate accounts: "his," "hers" and "ours." This way, there'll be room for different investing styles to flourish and no room for recrimination - only merciless teasing.
â Negotiate. Sometimes you have to give a little. Spend time trying to arrive at decisions that serve you both. If both partners have "us" as the first priority, everything is negotiable.
â Cooperate. No matter what your resistance to the investing process, give it your all and be your family's chief co-operating officer.
â Celebrate. Make all wins special events. If your spouse is resistant to investing but inches toward cooperation by picking up a business journal, acknowledge and celebrate the progress. Don't neglect small movements in your partner, even if it's merely a willingness to remain open to discussion.
For more financial advice for couples, visit www.fool.com/News/mft/2005/mft05081809.htm or read Dayana Yochim's "The Motley Fool's Guide to Couples & Cash" (The Motley Fool, $12.50). Then live happily ever after, financially.
MY DUMBEST INVESTMENT
Back in 2000, I read about an exciting utility company. It was Enron, and I jumped right in solely on a good gut feeling. Soon enough, it plunged from $70-something per share to $7, at which time, instead of checking what the reasons for the plunge were, I promptly phoned my full-service broker and bought another lump (made even more expensive by the full-service brokerage fee). My investment is currently worth a bit over $14. (To add insult to injury, the day after Enron collapsed I got an e-mail from my brokerage, advising me to sell.) I paid dearly for my education. Some lessons I learned: Never go with the buzz over any stock; do your own due diligence. You don't need a full-service broker. What you can save in brokerage fees is best invested in more stock or, at the very least, buy yourself and the missus a good dinner; don't buy it for the broker. - Jorge Perez de Lara, Cuernavaca, Mexico
The Fool Responds: These lessons were painful, but well worth learning. Get the scoop on brokerages at www.broker.fool.com.
Based near Dallas, I've averaged double-digit annual growth since I was launched in 1963 with $5,000. I'm a premier direct seller of skin care products, with annual global sales around $2 billion. My independent sales force is composed of more than 1.5 million people in more than 30 nations. My founder used the Golden Rule as her guiding philosophy, and encouraged employees and sales force members to prioritize their lives: God first, family second, career third. (She's written several best sellers, too.) Some of my top salespeople travel in something that Bruce Springsteen has sung about. Who am I?
Last Week's Trivia Answer: My slogan is "Cover the Earth." Founded in 1866 and based in Cleveland, I'm North America's largest single-source supplier of paints, stains, masonry coatings and brand-name wall and floor coverings. I developed dry chemical pigments, brushable lacquers, synthetic enamels and emulsified finishes. These days I'm developing environmentally friendly coatings. My brand names include Dutch Boy, Krylon, Dupli-Color, Pratt & Lambert, Thompson's and Minwax. I serve the automotive, industrial maintenance and traffic paint markets, among others, and have more than 3,000 stores. My yearly revenues top $6 billion, and I've increased dividends annually since 1979. Who am I? (Answer: Sherwin-Williams)
THE MOTLEY FOOL TAKE
Banks may be good places to invest in 2006. Consider Wachovia (NYSE: WB), a high-quality super-regional bank.
For the fourth quarter, revenue was up 7 percent - an OK result. While net income was reported as up 18 percent, that's not exactly the whole truth, because it includes a gain from discontinued operations. Looking instead at income from continuing operations, you see growth more on the order of 3 percent. Return on assets and return on equity, meanwhile, were both higher than year-ago levels.
Wachovia's average loan growth clocked in at 21 percent, and average core deposits grew 10 percent. Credit quality remains very good, and the company may be hard-pressed to improve it much.
Some folks might grouse about the higher non-interest expenses in this quarter, and that's certainly relevant. A bigger risk, though, seems to be the market's worry that Wachovia will do another big deal - perhaps one that would overstretch and hurt its performance.
Wachovia seems unlikely to expand into the Midwest, though, as that area of the country is growing more slowly than Wachovia's home turf and already has a lot of competition - not exactly an appealing scenario. Instead, look for selected deals in states such as California and Texas.
In the meantime, these shares might hold some appeal for value-oriented folks who like to collect a nice little dividend (recently above 3.5 percent) while they wait for capital gains.