One of the more common fund raisers for youth groups around here is the “Entertainment” book. It’s essentially a rather thick book of coupons (the Des Moines area one we have has about 300 pages) with a lot of “buy one, get one free” offers – and some straight-up discounts – on items from local businesses. For us, the book cost $20 and most of the coupons last through the following November.

At first glance through the book, it seems like a spectacularly good deal. Not only is your $20 helping out a local youth group or civic organization, you also get an enormous book of coupons for items from a lot of local businesses and chain stores. For me, the real value comes in the coupons for buckets of balls at a local driving range – you can buy one and get a bucket for free. This means that my $4 or $5, which would normally buy a single bucket of balls and thus provide me about an hour’s worth of entertainment suddenly becomes two hours’ worth, or else it lets me go bash some balls around with a friend for free (assuming of course my pal buys a bucket).

There are two reasons why a book of such coupons might not pay off – here they are along with strategies for overcoming them.

The first possibility is that you’ll end up spending more because you have the coupons. One good way to fend off this possibility is to go through the entire book of coupons soon after you get it, pull out all of the coupons that you’re pretty sure you’ll use, then get rid of the book so you’re not tempted to use some of those other “coupons” to spend money you shouldn’t be spending. I went through our book and pulled out somewhere around 50 coupons, then I proceeded to give the book to friends to pull out more coupons that they might use – I didn’t even want the temptation to “buy one, get one free” at a local coffee shop.

Another possibility is you might forget all about the book. The best way to do this is to keep the book out in a place where you’ll often see it. We do this by keeping the coupons we already pulled out in our coupon box, which we go through so often that we regularly see the ones we decided to keep. I also keep about three of them in my wallet at all times – almost always, I’ll carry one around to bat a bucket of balls at a driving range.

Here’s the bottom line on such books: if you look at it as a way to participate in a group’s fund raiser, it’s definitely worthwhile. I’d much rather have one of these books that could potentially save me some money rather than an overpriced item out of a catalogue that I don’t want at all. From a strictly frugal standpoint, it’s questionable as to whether it saves money – for example, I’m more likely to go out and whack away at a bucket of balls for $3 than for $6, but would I have gone anyway without the coupon? Still, if an “Entertainment” book is an option for you as a fundraising purchase, it’s likely a much better option than some of the other overpriced things you could be asked to buy.

I received a really interesting story from a reader named John. He has his financial head in the right place, but some other pieces of his overall life puzzle aren’t quite in alignment. Take it away, John:

I am 29 years old and I have just recently started to jump into real estate investing part time in my hometown. I currently work a regular full time job that pays $43K a year. Just last month I sold my first “project house” and used the profits to be completely debt free (other than my $110K mortgage, 5yr fixed @ 5.9%). I also now have $40K left over sitting in a high interest savings account (5.05%). My plan was to hold onto this 40K and use it to further my real estate investing career. I would use it for downpayments, renovations etc. Without this money, I really do not have any other way of purchasing my second “project house”.

I have been living with my girlfriend for over 2 years now and I am 90% of the way to having the money saved to buy her an engagement ring (should be there by Nov). She just finished school and is coming out holding a little over 20K (interest of ~6% on both) of school debt. Her current full time job is paying her only ~$30K a year.

My question is this:
Should I use 20K of the 40K that I have saved to pay off these student debts?

Pros:
* 20K will take her quite some time to pay down when she is only bringing in $1500 a month and it will be pretty hard on her.
* She (we) will save quite a bit in interest costs by paying this off completely.

Cons:
* This move would limit my RE investing options, as I would only have about 20K to work with.
* I am worried that she won’t learn the value of being debt free as she hasn’t experienced what it is really like to be frugal.

John’s in a situation where there are a lot of questions about his immediate future that he needs to answer. Let’s move through some of these questions one at a time and see how they affect John’s best move.

First, is she going to accept his marriage proposal? This is a very important question because it may likely lead straight into wedding expenses and other such costs associated with this, meaning that he probably would want to have the cash for the wedding liquid rather than tied up in real estate.

Next, would he still want to pay off her loans if she didn’t accept the proposal? Some people might automatically believe the answer here is “no,” but it depends on who John is as a person and also the type of relationship he has with this woman. If the debt repayment is contingent upon the proposal or upon the marriage, then he should wait to pay it off – if it is not, he should pay the debt off immediately.

Also, how valuable is this real estate investing career? For time and money invested, how much did John actually make on the first house? I would figure up an hourly rate including all time invested and all costs and see how it did. If it’s minimum wage or less, the real estate career should be viewed as a hobby and put somewhat on the back burner compared to eliminating debt and paying for the wedding.

I’m also not sure about the comment about “hasn’t experienced what it is really like to be frugal.” I think that’s an issue you need to talk about within the relationship, as there is no advice that can really be given to address that aspect that isn’t pushy or assumes quite a bit about the relationship. Just sit down and talk about frugality and spending – make sure you both understand that the best way to go over the long term is to always spend less than you earn and the bigger the gap, the better.

My perspective is this: if you are sure that you are going to be married in a year or two and you’re not in the middle of a real estate boom, your best bet is to pay off her debt immediately, then pay for the wedding without incurring more debt. If either of those assumptions are in question, then the situation requires a lot more detailed thought.

Of course, with a situation as complex as this, I’m sure my readers will have some additional ideas.

In the past, I reviewed the other two books in the “Little Book” series: The Little Book Of Common Sense Investing covers in detail the investing philosophy of buying and holding low-cost index funds, and The Little Book That Beats The Market, which describes the investing philosophy of buying individual stocks based solely on return on capital and earnings yield. I quite enjoyed them both – they both started out at a level where a person who didn’t know the first thing about investing could jump right in and follow along to the point of understanding the basics of an investing philosophy.

Since I enjoyed both of those so much, I almost couldn’t wait to read The Little Book of Value Investing. Value investing is the term used to describe the general investing philosophy of Warren Buffett and his mentor Benjamin Graham – it seeks solely to find companies whose stocks are undervalued compared to the strength of the company itself. I envisioned this book to be a lighter, easier to read version of Benjamin Graham’s classic The Intelligent Investor (which I’m currently rereading for a future review on The Simple Dollar), a book which Warren Buffett himself describes as “by far the best book on investing ever written.”

Does The Little Book of Value Investing really live up to its potential? Is it a good book for the average investor to read, or should they just read The Intelligent Investor instead? Let’s dig in and find out.

A Little Look At The Little Book of Value Investing

Chapter 1 – Buy Stocks Like Steaks … On Sale
The Little Book of Value Investing opens with the idea that buying stocks is often analogous to shopping in the supermarket. Some investors buy the sexy, well-packaged glamour products – and sometimes they pay off and have something delicious inside. On the other hand, others go in and look for items that are on sale and present the best value for the dollar. Growth investors are people who buy the products that have “buzz;” value investors are the people comparing the cost of green beans. Growth investing is more glamorous, but value investing pays off, slowly but surely.

Chapter 2 – What’s It Worth?
A growth investor sits back and waits for opportunities to buy stocks for less than what they’re worth and sell stocks for more than what they’re worth. It doesn’t matter how fast the company is growing or anything else – if it’s a value, one should buy it; if it’s overpriced, one should sell it. That’s the growth investment philosophy in a nutshell.

Chapter 3 – Belts And Suspenders For Stocks
Warren Buffett is quoted as saying, “Rule number 1: Never lose money. Rule number 2: Never forget rule number 1.” However, investing in stocks is risky, even if you’re quite confident of your investing philosophy and criteria. The way around this is to buy a lot of different stocks that match your criteria in a lot of different sectors – in other words, diversify. The book recommends a portfolio of at least ten stocks, something that is recommended by many different investment philosophies.

This chapter also talks about the concept of “margin of safety” investing; in other words, if you can figure out what the actual price of a stock should be, how much below that does the stock have to be before you buy it? Benjamin Graham, the father of this philosophy, had a two-thirds margin of safety, meaning that a stock had to be priced at one third or less of the expected value of the stock – that margin is basically impossible to find today, but a one half margin or a one third margin is quite doable.

Chapter 4 – Buy Earnings On The Cheap
The first basic tenet of identifying value stocks is to look at their earnings and compare them to the current price of the stock. This is often quoted as the P/E ratio, as can be seen on information on Cisco’s (CSCO) stock at Google Finance. The regular P/E refers to the price-to-earnings ratio between the company’s most recent report and the current price; the forward P/E refers to the price-to-earnings ratio between what analysts estimate the company to earn in the next report and the current price. Generally, the forward P/E is more useful, but it’s not highly accurate. The lower the P/E is, the better the value of the stock is, in general.

Chapter 5 – Buy A Buck For 66 Cents
Another powerful technique is to seek out stocks that are selling below the book value of the company. In other words, multiply the number of shares outstanding by the cost of the stock (sometimes listed as the market capitalization of the stock) and compare that to the book value of the company (which you can usually find with a bit of research). Currently, Cisco has a book value of about $32 billion but it has a market capitalization of a bit over $180 billion, which means that under this criteria, Cisco is far from a value.

Chapter 6 – Around The World With 80 Stocks
This is a very brief chapter that basically says that the principles of value investing work with stocks all around the world, not just domestically. The only difficulty with this is that the data for international companies may not be as rich as they’re not required to do SEC filings like United States companies are, but values exist in every market all around the world.

Chapter 7 – You Don’t Need To Go Trekking With Dr. Livingston
Continuing the idea that one can invest in stocks abroad with value principles, The Little Book of Value Investing recommends sticking largely with nations that have stable economies – don’t put your money in a stock of a company primarily based in a nation without a stable government. As a rule of thumb, the book recommends all of Western Europe, Japan, Canada, New Zealand, Australia, Singapore, and non-Chinese stocks in Hong Kong – the book’s rather adamant about avoiding China.

Chapter 8 – Watch The Guys In The Know
Another useful tool for finding value is to watch what the insiders at a particular company do. Anyone that holds a significant portion of a company’s stock has to reveal their investment moves publicly, which you can easily follow by carefully researching the company online. If you see that one of those insiders made a sell, it’s not that big of a deal – if you see one making a buy, though, that’s likely an indication that there’s something very positive going on that’s not quite publicly known yet. If you find a potential value company that you’re interested in and you see that the company’s insiders are buying the company’s stock, that’s a sure sign that you should buy in, too, because when the reason that the insiders are buying becomes public, there are likely lots of people who are going to want to buy in – meaning profits for you.

Chapter 9 – Things That Go Bump In The Market
The absolute best time to look for and buy value stocks is when the market is going down. During a bull market, people are often buying everything, making values much harder to find, but during a bear market, there are more sells than buys, thus prices go down and values become exposed. The author, Christopher Browne, uses numerous examples from recent downturns (1987, 1989, 2001-2002) that show this phenomenon to be true.

Chapter 10 – Seek And You Shall Find
So how do you find stocks that meet these criteria? Use the internet! I use the stock selection tools at Yahoo! Finance regularly to find stocks that meet certain criteria. Filter for stocks that are trading below book value, ones that have a very low P/E ratio (below 10), and ones that have seen some insider trading recently. Save them all in Excel and start looking for ones of interest to you. Ones that appear on multiple lists are usually good ones to start with.

Chapter 11 – Sifting Out The Fool’s Gold
Some of the companies on these lists will show up there for bad reasons, like Enron did in 2002. That means that once you find candidates you’re interested in, you need to make sure they’re not fool’s gold. Make sure the company doesn’t have much debt. Also check and see how stiff the company’s competition is by looking at other companies in similar businesses. The best choices are in companies that you can understand – if you can’t really comprehend how this business does business, don’t buy the stocks.

Chapter 12 – Give The Company A Physical
Now that you’ve found a few companies to look at in detail, start by looking at a company’s balance sheet. Things you want to see are at least some liquid assets on hand (cash, short term bonds) and debt that’s not overwhelming – if you don’t see either, red flags should be popping up. Basically, the less debt you see, the better, especially in comparison to the assets. Think of it this way: a person making $60,000 a year with $5,000 on a credit card is in better shape than a person making $12,000 a year with $5,000 on a credit card.

Chapter 13 – Physical Exam, Part II
Next, you should examine a company’s income statement (all of this stuff is pretty easy to find at Yahoo! Finance). The big things you want to see is steady, stable growth in revenue and a stable gross profit margin over time – and the longer the timeframe, the better. You should also look at ROC – return on capital – which indicates how the company is reinvesting in itself. If it is steady (or even better, increasing over time), that’s good – if it’s dropping, that’s bad.

Chapter 14 – Send Your Stocks To The Mayo Clinic
This is perhaps the best chapter in the book, asking sixteen researchable questions that you should know about the company you’re about to put your money into. Most of them can be found out with some internet searching, reading of company reports, and so on – they’re not complicated, just very useful in helping you figure out how good of a company you’re looking at. If the answers make you feel confident in the company, it’s time to buy – if not, back off.

Chapter 15 – We Are Not In Kansas Anymore! (When In Rome…)
After all that, it’s also important to note that accounting practices in other countries often result in things like P/E ratios that are incompatible with comparison to American companies. The author uses a comparison between several candy conglomerates to demostrate this, showing that sometimes a comparison between an American P/E and a non-American P/E isn’t exactly fair because expenses have different meanings in different nations.

Chapter 16 – Trimming The Hedges
Another important aspect to consider with investing in stocks in foreign nations is the currency you’re using to buy the stock. Let’s say, for example, one buys a British company – effectively, not only are you investing in that company, you’re also investing in the British pound, the currency that’s used to trade the company in London. So, if you bought British Company X in 2003 when a British pound was worth $1.70, it stayed completely even, then you sold it in 2006 when a British pound was $2.00, you made some significant profit (not even counting the dividends).

Chapter 17 – It’s A Marathon, Not A Sprint
Another vital tenet is that you’re buying for the long term, and that short term market timing is a fool’s game. If you believe that a company is a good deal now, stay in that company until you no longer believe that to be the case, regardless of what the market does. It should be based on the company itself, not on the broader market’s direction. Buy when a particular stock is a value, sell it when it isn’t.

Chapter 18 – Buy And Hold? Really?
Buy and hold works, but only for the long term – ten years or more. If your timeframe is shorter, you should buy bonds – if it’s even shorter than that, you should keep it in cash in a savings account. The market goes up and down all the time, and the closer you get to the time you want to use the money, the more stable it should be. Bonds are pretty stable – cash is even stabler. This way, you know what you have right as you approach the day of destiny and a sudden short-term market downturn can’t derail you.

Chapter 19 – When Only A Specialist Will Do
If you decide to hire a money manager, realize that most of the stuff they’ll tell you is unimportant hogwash. Instead, ask them what their investment approach is. If they can’t explain it to you in easy-to-understand terms, get out. Then ask them to show you how they’ve applied it over a long period. Again, if they can’t, get out. Then ask for their track record – the track record of the person actually managing your money, not the history of the fund or the brokerage. If it’s not good, get out. Finally, ask the person what they do with their own money – if they do anything different than what the fund does, there’s something fishy going on.

Chapter 20 – You Can Lead A Horse To Water, But…
Value investing has several psychological tick marks against it – it’s not sexy, it can be boring, and overconfidence can derail you from making good choices. Just stick with the numbers and you’ll make money over the long haul – it’s when you start breaking from those numbers that is the problem. Also note that compared to many other investment options, you won’t completely outshine the market during a bull run – the sexy stocks are the ones that will spike. It is during a down market when value stocks shine – you can find bargains and quite often value stocks ride through a storm with no problems. This is why if you look at value stock returns from 2003-2006, it won’t shine as brightly as some overall market indicators, but in 2001 and 2002, value stock portfolios generally had a positive return while other portfolios were tanking.

Chapter 21 – Stick To Your Guns
The book concludes that no matter whether you believe in value investing or other investing philosophies, you should stick to your guns and consistently apply those principles. It’s when you abandon principles and make unbased decisions that things can get very shaky. This is spectacular advice.

Buy or Don’t Buy?

If you’re looking for a soft introduction to the concepts of value investing, something you can read a few pages of a night for a month and get the basics down cold, The Little Book of Value Investing is well worth reading. It discusses the broad philosophy without getting bogged down in much detail at all and is quite easy and enjoyable to read.

It really is a shortened and less detailed version of The Intelligent Investor. It’s organized far differently and the ideas are presented in something of a different order (and in much less detail), but the concepts are basically identical.

My feeling is this: if you’re interested in investing but have no idea what value investing is, stop at a bookstore and start reading The Little Book of Value Investing. If you find that it’s answering the questions you have, it’s well worth picking up. On the other hand, if the information is really intriguing to you and you want more detail and breadth, put this one back and get The Intelligent Investor instead.

My feelings about this book are much like the others in the series: they’re great introductions to specific investing philosophies and if you have no idea about investing at all, these books are all very good. If you really want to learn about that specific philosophy in depth, though, there are other books that are better worth your time.

The Little Book Of Value Investing is the forty-second of fifty-two books in The Simple Dollar’s series 52 Personal Finance Books in 52 Weeks.

With the baby’s arrival this coming weekend, everything is in overdrive around here. Preparations of all kinds are in full swing – clothes being washed, stuff being rearranged, cleaning for the impending arrival of grandparents, and so on. Whew!

A Good Example Why You Shouldn’t Put Too Much Stock Into Investing Newsletters I personally don’t see the point of them. Why would anyone give you their “hot” stock picks unless they’re trying to milk you to make a buck themselves? There’s a big difference between giving general useful advice and saying “Buy MXTPR at 5.” (@ generation x finance)

Wait A Month To Buy A brilliant tactic to fight off any potential splurging when shopping. (@ dual income no kids)

The “Luck Factor” In Investing No matter whether you believe in market timing or not, this post will convince you that you’re right. (@ all financial matters)

The Simple Dollar Retro: Overcoming The Social Obligation To Keep Up With The Joneses This is actually a bit tougher for me than it used to be. I have Lexus drivers on either side of my house while I still proudly drive my decade-old Ford truck.

I get a lot of email from readers (and from spammers) about so-called debt elimination programs – organizations that promise to “eliminate” large portions of your debt and leave you debt free in a certain number of years. Do they really work, or is it a scam?

I looked into several of these via “free trials” and almost every one of them was essentially the same – a compilation of decent personal finance advice crammed together in the framework of a plan. Most of them included a computer program to create a simple monthly budget for you and also tell you which debt to pay off first and how much to pay on that debt – essentially a computerized version of Dave Ramsey’s “debt snowball.”

Do these programs “eliminate debt”? They sure do, but probably not in the immediate “debt free” sense that you’re thinking. Instead, they put you on a very hard debt repayment course that’s designed to have successes along the way so you can feel like you’re making real progress, plus they usually tell you to call creditors and negotiate with them, offering some basic techniques for doing so, or encourage you to visit a credit counseling service.

These programs also claim to raise my net worth? Whenever you start paying off debt, your net worth will begin to go up over time – or at least the downward slide will begin to slow. Let’s say you have $20,000 in assets, make only $150 a month, and you have $10,000 in debt at 18% interest. Your net worth is $10,000, but you have to make payments of $150 every month just to stay in place – and this situation will continue forever. If you instead make payments of $300 a month, the first month will see no difference in your net worth – your assets will total $19,850 and your debt will total $9,850, giving you a net worth of $10,000 again. But the following month, that $300 will pay more principal and less interest than before – your debt is smaller and thus doesn’t earn as much interest – and so after the second month, your assets would be $19,700 and your debt would be $9,697.75. Your net worth is thus $10,002.25 – it’s gone up just because you’re taking care of your debt. The increases in net worth occur because of the decreases in debt.

This sounds harder than the ad makes it sound. It is – there is no legal method of getting completely free of your debts. These plans are just like any such “life transformation” plan – they work spectacularly well if you’re truly committed to the change, but they aren’t worth the paper they’re printed on if you’re not. Even more importantly, such programs are usually made up of information that’s available for free – or close to it – elsewhere.

Here’s the scoop: if a program like this is appealing to you, instead just go to the library and check out Dave Ramsey’s book The Total Money Makeover. The meat of these debt elimination programs can be found in that book – and the book can be checked out for free at your library instead of paying the exorbitant cost of the debt elimination program.

This is a question that my wife and I have wrestled with recently with our home purchase, our move, a severe illness, relatives visiting, and the impending birth of our second child, all in a two month period. Individually, these items are just part of life and can be dealt with, but in such succession, do they add up to an “emergency” worth tapping into an emergency fund for?

The answer to this question entirely depends on how one defines an emergency fund, and there is no strict answer to this. However, if you have an emergency fund (or are thinking of starting one), you need to make sure that you understand the purposes of this fund. Here are some questions to think about.

Can I use the fund if I am able to pay for the expense within my normal monthly budget? For example, I can actually cover the costs of each of these events within my normal monthly budget, but it is expensive and it leaves no breathing room at all.

Can I use the fund to pay for non-necessary expenditures? For example, I used part of our emergency fund to pay for a moving service when we moved when I realized that moving was going to be a massive project. It was not a strictly necessary expense, but it was very important and afterward my wife and I definitely felt that it was a worthwhile expenditure.

Can I use the fund to pay off credit card debts? If the credit card was used to catch a true emergency, then sure. If you’re just using the emergency fund to pay off a debt from a weekend of big spending… it’s probably financially worthwhile, but you need to think carefully about your choices.

Many people start an emergency fund with the general idea that they will use it to cover an “emergency” without thinking about what that emergency might be, then they get nervous when something unexpected happens.

My advice? Trust yourself. If you have enough sense to have built up an emergency fund, you probably have enough sense to decide whether money in the fund should be used for a particular expense. Just trust what your heart is saying and make the move – as long as you aren’t building up debt and you’re making a financial move that’s beneficial to your life, it’s probably the right move.

What do you do when you can’t afford to reciprocate the generosity of others? Jane writes:

I’m 26 now, and it seems that everyone I know is getting married (including myself). The problem is that my friends and family are scattered throughout the country. If we were to attend each of their weddings, my fiancee and I would be paying for two round-trip flights, plus a hotel room, plus a wedding gift every few months. We simply can’t afford that, but I really wish that we could be at each of those weddings, because some of these people are very close family members and friends. Additionally, I worry about looking rude, because they’ve all found some way to get to our upcoming wedding. Do you have any suggestions for ways to explain politely that we can’t afford it? Is there anything we can do to communicate our love and support without actually going to the wedding? If we have to choose between friends’ weddings (attending some but not others), how can we keep some friends from feeling offended that we didn’t choose to attend theirs? If we do attend some of the weddings, do you have any suggestions for saving money while attending a wedding? Ordinarily we only visit cities where we know we can stay with friends, and we choose our travel times to minimize the cost of travel, but with a wedding those things are out of our control. Any ideas you might have would be greatly appreciated.

My personal advice would be to not attend any weddings that would require enough financial outpouring that it causes you to have difficulty paying your bills. Here are some important things to remember:

An invitation is not a requirement to attend. It’s merely a statement from the sender that they wish you to attend their event. One should never feel like they have to come to an event.

Honesty is the best policy. If you make a decision that you can’t afford to come, be honest about it. Call the person and explain exactly why you can’t come. If you think that you can’t do this for some reason, then what’s the basis of the “close” relationship that would compel you to go to their wedding in the first place?

Thoughtful gifts mean more than expensive ones. We got many expensive gifts for our wedding, but the two that really stood out were simply very thoughtful ones – and neither of those were expensive at all. Spend some time thinking about the people involved and your relationship to them. Often, a very good idea will eventually occur to you – and often it is one that isn’t particularly expensive, either.

Make every possible arrangement to reduce costs for out-of-towners to come to your wedding. Find places for everyone to stay if they can’t afford a hotel. Host meals for the out-of-town guests. In short, do whatever it takes to reduce the costs for people willing to make the trip to your wedding. This will be greatly appreciated by the people who do attend, and they may be more likely to help you in the same way if you choose to attend their wedding.

Another tip: if you do wish to attend some of the weddings, you should make a clear demarcation between the ones you will attend and the ones you won’t. For example, you may choose to only attend the weddings of people you are related to or just the weddings of people in your bridal party. This way, you avoid any hard decisions that may hurt feelings.

This Sunday, my wife is getting induced into labor, meaning sometime early next week I’ll have a bouncing baby girl to add to our household. Am I nervous? Yes. Am I excited? Yes.

Take It To The Top: Getting What You Rightly Deserve From Customer Service If an issue with a product is severe enough that you’re on the customer service like, you deserve some answers. Here’s how to get them. (@ wise bread)

Camping Frugally: Spending Less In The Wilderness When I was a kid, I went camping with my dad. We slept outside in sleeping bags, no tent. We made our camp fire out of what we could find and a metal striker. The memories are wonderful. (@ finance is personal)

What Are Your Money Leaks? My biggest money leak has pretty much always been reading materials – books and magazines. I’m an unabashed bibliophile. (@ the tao of making money)

The Simple Dollar Retro: Ten Financial Reasons To Turn Off Your Television – And Ten Things To Replace It With One of my most popular posts ever.