Investing: September 2007 Archives

I’ve been thinking about retirement and making some changes to our investments, and it occurred to me that most of the financial advisers out there have got it wrong when it comes to retirement. For example, David Bach, author of The Automatic Millionaire, talks quite a bit about saving for retirement using a 401(k) as if that were the point. Sadly, this is confusing the means with the end.

The phrase “save for retirement” generally mean spending less than you earn and putting the left over cash into some form of account targeted at retirement, such as a 401(k), IRA, or Roth IRA. But saving money isn’t really the point. The real goal is to live comfortably during retirement when you can no longer work to earn an income. Or in other words, to collect enough passive income to live on.

One (overly hard) way to do this is to save a bunch of money in a bank account, and then just live off of the principle. This isn’t the best because it requires a lot of cash. Investing the principle and living off the interest costs less because you’re earning interest on the unused principle. And if you’re going to invest, you might as well invest now when the consequences of a market dip or making a mistake aren’t quite as serious. This is how we got government sponsored retirement accounts.

But the right goal is not to save money or contribute to a retirement account, which are means to an income during retirement. The right goal is to create a stream of passive income on which you can live. A Roth IRA does meet that goal, but there are easier ways that require less cash. That is one reason for my interest in investing in real estate and starting a business, but anything that puts money in your pocket each month will work. The best thing is that, by buying or creating the right assets now, I can “retire” the moment my passive income is enough to meet my needs.

So I’m trying to find and buy assets that put money in my pocket each month without requiring work on my part. I’ve had to learn a lot, and I’ve made mistakes, but I’m optimistic about making things work during retirement. I only mention this because it just occurred to me today how the mantra “save for retirement” has set so many people on the wrong track.

Apple introduced a new line of iPods yesterday, including a touch sensitive one that is basically an iPhone without the phone. However, the stock price dropped about 7% since the announcement. Why? Apple also cut the price of the iPhone by $200, or about one third. And that will hurt Apple’s profit margins.

Since I recently mentioned that I was keeping Apple and selling JetBlue stock, I just wanted to say that I wish I had money to buy more of Apple. I think their decision to go for market share by dropping the price will be very good for Apple in the long run. The stock price drop shows how short-sighted many investors are. I see this as a buying opportunity.

Despite being on target to sell their millionth iPhone this month, it looks like Apple is going to go for market share over profit margins in the cell phone market. Steve believes Apple made a mistake in the early years when, instead of pushing prices down and going for market dominance, it kept prices high, earned lots of money for a while and then lost most of their market share (and profits). Apple is still recovering from that mistake.

This time Apple is going to go after as much market share as they can. Their short-term profits are going to take a hit, but Apple is gaining a long-term, recurring stream of income. From all accounts, people love their iPhones and are very likely to keep using them. And Apple gets a cut of the monthly payments each customer is making to AT&T.

As for putting all my investment money into Apple, I’m going to follow Andrew Carnegie’s and Warren Buffet’s advice to keep all my eggs in one basket and then watch that basket closely.

I few months ago, I purchased shares of JetBlue. The stock is down 12% or so since I bought, and I’ve decided to sell. I’ll be “locking in” a loss, but I need some cash to help pay for finishing our yard and had to choose between selling JetBlue and selling Apple. And I think Apple is a better deal.

I still think JetBlue is at the bottom of a cycle and will be up over $15 by next summer. However, I’ve decided to stay with Apple. They are announcing new products and services like crazy. And they seem to be the only major company that has figured out that making things people want to buy is a good strategy.

So, I’m keeping my winner and selling my loser. If I’m right about JetBlue, it should grow about 50%. Apple has about the same potential (which would put it over $200/share), but is more certain. I guess it seems more certain because I understand Apple and it’s market a lot better. Besides, don’t you love your iPod? And your Mac? And your iPhone?