Chan's Personal Blog

A few weeks ago, I had a friend come up to me and said, "Hey Chan, I've finally saved up $1,000 and I want to invest it in the stock market, how do I start?" How to start investing is an entire other blog posting. But anyway, the first question I always ask people is, how much credit card debt do you have? Usually people are confounded by my answer as it seems to have nothing to do with the stock market.

The reason why I ask this is because finances revolve around liabilities and assets. Liabilities is a fancy word for debt. Assets is stuff that's worth money. Your networth is assets minus liabilities, and my job is to try to help you increase your networth if you're asking me questions about finances.

Anyway, the person said they had about $2,000 in credit card debt. My advice was to take that $1,000 and pay down the credit card debt. At this point, the person remarked, "But Chan, if I invest $1,000 in the stock market, I can make more money and use those gains to pay off some of my credit card debt." In theory that may sound good, but in reality, it's not.

Lets go through why paying down credit card debt is better than investing in this case, as much as I am a fan of the markets. Firstly, there are no guarentees in the stock market. Yes you could make a 100% return, but you could also lose everything. Secondly, credit card interest rates are insanely high, so any profits you may make in the stock market will be erased by credit card interest payments. Lets take some examples.

To keep the calculations simple, I'm going to assume the subject does not make any credit card payments throughout the year. In addition, I'm assuming that the subject has $2,000 in credit card debt, and the interest rate on that credit card is 18.5%.

Scenario 1: Let us also assume that the subject has $1,000 invested in a medium risk mutual fund which has an 8% return.

Assets = $1,000 + ( $1,000 X 0.08 ) = $1080
Liabilities = $2,000 + ( $2,000 X 0.185 ) = $2,370 (credit card debt)

Networth = $1080 - $2370 = -$1290

Scenario 2: Let us assume that the subject has $1,000 invested in a medium risk stock and lost 8%.

Assets = $1,000 - ( $1,000 X 0.08 ) = $920
Liabilities = $2,000 + ( $2,000 X 0.185 ) = $2,370 (credit card debt)

Networth = $920 - $2,380 = -$1460

Scenario 3: Let us assume that the subject has used the $1,000 to pay down their credit card debt.

Assets = $0
Credit Card Payment = $2,000 - $1,000 = $1,000
Liabilities = $1,000 + ( $1,000 X 0.185 ) = $1,185

Networth = $0 - $1185 = -$1185

Results: As we can see, scenario 3 results in the highest networth. By paying down debt, the subject has reduced the amount of interest being added to their debt. This essentially frees up more money since the debt will be growing at a slower rate.

Again, yes you could argue that someone could make a 20% return in the stock markets, but that's a pretty dang good return. A return that large also means a certain amount of risk has to be taken upon. Why risk it if you have a guarenteed way of reducing debt that grows at 18.5% a year? When you pay off that debt, it's like getting 18.5% more money to work with.

When in comes to debt reduction VS investing, debt reduction wins out if the interest rates are insanely high. This is why when people ask me about investing, I always ask about credit card debt first. I treat it like the plague. Debt reduction doesn't always win out though, sometimes investing wins out if you have low-interest debt, but still, less debt is good. You can't go wrong with that strategy.

This week in the stock market, the Dow Jones Industrial index and the Toronto Stock Exchange both crossed 12,000 points. The Dow is now at a historical high. Since the Dow has been around since May 1896... that means that the Dow is now at a 5760 week high!

We saw a bunch of big companies report their quarters this week as well. Apple, AMD, Intel, Caterpillar, Yahoo, to name a few. But there was one stock that completely blew away the numbers and kicked butt. Here's a hint:


That's right, Google (GOOG). Its profits were up 70%. Last quarter, Google predicted that would make $1.81 billion. They reported that they actually made $1.87 billion. Now that's blowing away the numbers.

TheStreet.com had an article entitled, "Good Night, Google Bears" (A bear is an investor that bets against a stock, and makes money when a stock goes down.):


A few weeks ago, I picked up a few shares of Google based on the recommendations of Jim Cramer. He said that for college/university students who have a little bit of money to invest, but not enough to build a diversified portfolio, they should pick up a few shares of Google. He said not to let the $400+/share price scare you because that's not how you gauge if a stock is expensive.

So, I picked some up, and some of my friends told me that I was crazy going after such an expensive stock. For example, they said that the stock has to move up $40 a share just to get a 10% return on investment which would be hard. What they don't understand is, big stocks move big. Google went from $420/share to $460/share this week alone. Jim Cramer suggests to divide the stock price by 10 if you were having a hard time comprehending a $400+ stock. Does a $40/share stock going to $44/share sound so crazy? No. It's all psychological.

Anyway, there were some high fives being exchanged in the office when Google jumped big that day. It was sweet action.

Here are this week's International Bank of Chan's numbers. Cwing holds the lead, but the gap is closing. Throughout the week, Myron, Patrick and I were all battling back and forth for second place until Google reported and Patrick was propelled into second place since he went all-in with Google. Myron also did exceptionally well this week because Apple reported a fabulous quarter, and the stock jumped from $73/share this week to almost $80/share. I wouldn't be surprised if Apple went to $100 considering how confident they were in their conference call.

Rank	Name	Net Worth	Total Return	# Transactions in last 40 days
1	cwing	$10,665.22	+6.65%	22
2	Pirate (Patrick)	$10,509.98	+5.10%	2
3	do_da_beep (Myron)	$10,406.22	+4.06%	5
4	chan_316 (Me)	$10,202.26	+2.02%	10
5	Robbykl1415	$10,023.10	+0.23%	0

There's a funny side story about this. I was talking about stocks with Myron over dinner last week, and he mentioned that Apple was reporting their numbers this week. After he told me, he went, crap.... it was a secret, you're not allowed to buy any Apple in game because it's going higher! I guess this was his ace up his sleeve. Well played good sir.

Recently I've been in the market for a new credit card. I was talking to Myron about it, and he directed me to this awesome government website that reviews all credit cards that are available to Canadian consumers. They summarize every credit card in an easy to read document. It compares the interest rate, rewards program, annual fee, grace period, etc. This has saved me so much time because I don't need to visit a bunch of bank websites to get all that information.

So, if you're looking for a credit card, this is definitely a great resource to check out. I have to give my standard disclaimer though, if you can't handle debt, don't get a credit card. A credit card can be the greatest financial tool or greatest financial burden. Thanks Myron!

After a horrible decline in the stock markets for the summer, things are finally looking good once again. The Dow Jones Industrial (DJI) index (the main American index) has hit an all-time high. The Toronto Stock Exchange (TSE) index has rebounded hugely today - up 189 points today! Here's a chart of how things are going so far with the two indexes:


Oil has been coming down a lot lately, so it's helping any consumer orientated sectors like restaurants, department stores, etc. So, that's why the Dow Jones is flying high these days. The TSE unfortunately gets knocked down because oil and natural gas makes a huge part of that index. Something like 25% of the TSE is natural resources, which have all been coming down.

Anyways, the market right now is in my favourite mode. This is the part of the cycle where tech stocks do very well, and this is my favourite sector because I understand it the best. Jim Cramer has been saying that everyone has to own at least one tech stock for the next quarter because this is when tech does very well. I personally have been moving my money out of natural resource stocks into tech. I added more AMD and Google to the old portfolio.

In honour of this bull market that we're in:

I missed you so much Mr. Bull. Where have you been all these months? Hurrah that you're back!

Some people have also been asking about the International Bank of Chan Fund challenge. Yes, that is still going on. For the first few weeks, things were kind of boring because things were just like the last game. Patrick and Myron would fight over first place, while I'd be down a few hundred dollars, and cwing would lose a thousand dollars. This week though, things have dramatically shifted around. cwing took first place in the middle of the week from Myron. I crossed the $10,000 mark for the first time this week as well.

Rank	Name	Net Worth	Total Return	# Transactions in last 40 days
1	cwing	$10,545.19	+5.45%	14
2	do_da_beep (Myron)	$10,196.92	+1.97%	5
3	chan_316 (Me)	$10,136.68	+1.37%	7
4	Robbykl1415	$10,018.70	+0.19%	0
5	Pirate (Patrick)	$9,468.35	-5.32%	2