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Financial Wisdom: Three Forces That Create Fallen Angels
Warren Buffet likes to say, when everybody is feeling fearful, that’s the time to be greedy and buy. And when everybody is feeling greedy, that is the time to sell. Investors, however, are less apt to take advantage of these same principles when buying stocks, and end up losing out on the best opportunities.
Market Crashes
Market crashes and panics are perhaps the greatest opportunity for buying investments when they’re cheap. Panics and crashes are relatively rare, making it unwise to wait for them before investing. When prices plunge because everybody is fearful, even the highest quality companies can be temporarily marked way down. Panics can stem from disastrous events like the World Trade Center attacks to something as simple as a spike in oil prices. After the attacks of September 11, markets around the world fell sharply, taking down even the highest quality companies regardless of whether these companies were in industries that would feel truly major effects from the attacks. The industry that was hardest hit, the airlines, fell to such extraordinary low valuations that the prices would only have made sense if the world had decided to stop flying entirely. While it was a difficult period for the airlines, the panic selling created an opportunity for investors. Other crashes are industry specific. Two years ago due to rising oil and gas prices, automobile stock prices tumbled. Ford and General Motors hit multiyear lows, and even market leaders like Toyota and Honda were trading at half their current values. Toyota and Honda have since regained their values, yielding great returns for anyone who recognized this selling as oil panic, rather than as a rational response to declining profits.
Recoverable Calamities
Unlike industry-wide drops, recoverable calamities cause major one-time company losses that result in unjustifiable, panic-driven stock price declines. Eventually the company returns to its old levels of earnings and growth, and it propels the stock higher. A recent, high-profile example of a recoverable calamity is the pharmaceutical company Merck. A couple of years ago, on the news that Merck’s painkiller Vioxx was linked to heart attacks, the company’s stock dropped to its lowest price in years. But Merck ultimately remained an extremely profitable business. It set aside some capital to settle lawsuits, and continued to post strong earnings. Merck’s price has doubled since its lowpoint during the Vioxx controversy.
Economic Recessions
Understanding how to take advantage of recessions can provide another buying opportunity. The housing market is slowing, which has caused prices on certain commodities, like copper, to decline on concerns that the cooling of the real estate market will lessen demand. At first glance, this would seem to make sense. The average house contains over 400 pounds of copper in the form of wiring, water pipes, and appliances. But as Nobel Laureate Simon Kuznets has noted, commodity prices move in cycles of 15 to 20 years because of the cycle length for public works projects like roads and airports. These projects will keep commodity demand strong for the next several years. And in the meantime, low commodity prices due to the drop in real estate have created another opportunity for the educated investor. — Gabriel Wisdom, host of Financial Wisdom on the Business Talk Radio Network (www.gabrielwisdom.com)

Oakland Raiders executive Marc Badain
Little Red Feather Racing
The real estate market may have cooled, but investors are seeking other hot opportunities. Little Red Feather Racing (LRF), with stables in Southern California and New York, offers shares in syndicated thoroughbreds. For an initial investment of about the same as a down payment on a home, horse racing enthusiasts can do more than just watch from the sidelines. In 2004 LRF took the racing community to new levels by winning the Breeders Cup Mile, a $1.5 million purse, with Singletary, a modestly priced horse. Billy Koch, grandson of Hollywood producer Howard Koch, founded LRF in 2002, naming it for his grandfather’s bedtime stories. Koch says the perfect investor is a person with disposable income looking for the most exciting investment they will ever make. To this he adds that rate of return (ROI) should not be the only reason to invest. "That being said, we believe the experience ROI, not measured in dollars and cents, is important to consider," Koch explains. Unlike mutual funds or rental property, race horse investing comes with glamorous perks: access to the Winner’s Circle and box seats, but Koch says this is just the beginning. "Owning a Little Red Feather horse is a lifestyle choice, akin to belonging to an exclusive country club. You meet interesting people in a fun atmosphere." LRF boasts a celebrity clientele of investors, including Tom Brady, LeBron James, Jay Z, Paul LoDuca, and ESPN’s Kenny Mayne. As with any type of investing doing one’s homework is imperative. LRF Racing offers educational services to its investors, from equine tax issues to watching workouts. Prospective investors might consider taking a course from the Racehorse Ownership Institute, located at Hofstra University. LRF, however, takes pride in their customer service. "Constant communication with our partners is a hallmark of LRF," Koch states. "How much fun is owning a horse if you don’t participate in his career?" Horses available for syndication can be viewed online. (818/383-7000, www.littleredfeather.com)
— Maggie Entwistle
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Fad Diets: Are Weight Loss Consumers Eating Up A Lie?
If a comprehensive new UCLA report gets its message across, the fad diet may soon be as dead as disco, but the conclusion only confirms what 50 million Americans on diets have learned to tune out for ages in their quest for an exercise-free magic bullet to kill fat. The review of 31 long-term diet studies appeared in the April issue of American Psychologist, lead authored by UCLA associate psychology professor Traci Mann. It could bring a sea of change for a $40 billion diet industry already feeling the burn of "carbs are back" messages in recent fast food commercials. For now, diet titans like Weight Watchers (WTW) and Lifetime Fitness Inc. (LTM) remain up (nearly ten and five points, respectively) over 2006 in the New York Stock Exchange, but Nutrisystem drags nearly 16 points down from its share price this time last year. And who can ignore the fact that Atkins Nutritionals, creators of the South Beach Diet, filed for bankruptcy well over a year ago. Though Mann’s review doesn’t compare diet plans, the results were striking across the board, with no clear winner. "There are hundreds of diet studies," Mann says, "but most only look at the short-term," where initial loss claims border on the miraculous. "We wanted to look at the long-term, to see if people kept the weight off." The majority of participants indeed lost five to ten percent of their weight within six months, but over four years, up to two-thirds of dieters gained back all the weight, and more. In fact, many studies indicated that past diet-plan weight loss is a leading predictor of future weight gain. The fad diet prognosis becomes even less rosy when the spotty data that backs weight loss claims studies is considered. Eight of the 31 studies Mann’s team reviewed had lower than 50 percent follow-up rates; most had participants report their own weight, and were never weighed by an impartial observer. Dieters flush with enthusiasm for the plan might massage their numbers to convince themselves that the plan is working, while backsliders tend to drop out without much fanfare. These biases, declares Mann, push outrageous weight loss claims into the realm of fantasy, but the diet customer, paradoxically, is hardly always right. "They may tell a lot of people that the diet sucked, but they don’t tell the clinician helping them. And they might not think the diet sucked. They give the diet credit for the amount they lost, and if they gain it back, they blame themselves." The Federal Trade Commission has launched over 100 investigations of diet programs in the last decade, but lack the resources to police those that fall short of clear malfeasance. The question of why diets fail is beyond the scope of Mann’s review, but the answer seems to be common sense. Michelle Murphy-Zive, MS, RD, principal investigator for the Regional Nutrition Network at UCSD, says that the simplest lessons about food and fitness are still better than any best-selling bacon Ponzi scheme. "Change the environment that you live in. Have fruits and vegetables cut up in your refrigerator, or skim mozzarella string cheese, so that when you feel compelled to snack, you go to those first. Restaurants serve huge portions. Eat half, take the rest home." The best diet includes all food groups in moderation, with a simple rule: you have to pay for it twice. Murphy-Zive explains, "You need to expend more energy than you take in by eating. You need 30 minutes of physical activity per day to burn what you eat." Busy dieters needn’t hit the gym every day but anyone can walk around the block a few times. "People say they don’t have the time, or they can’t stay on a diet for the rest of their life. We never say, ’diet,’ we say lifestyle change, and we talk to them about how to make these slow changes become habits." Murphy-Zive singles out Weight Watchers for its coordination of lifestyle changes and advice for eating out, but Mann counters that Weight Watchers fared no better than the rest in her study. Dieters chronically crawl from the wreckage of failed diet plans into shiny new ones because we crave a secret formula that will give us the same instant satisfaction as the food. Murphy-Zive puts it even more bluntly. "You can’t eat only bacon for the rest of your life. There is no magic pill, or I would be a millionaire." Mann’s study did find a minority who kept the weight off, but their secret weapon might scare you. "The one thing those people had in common was enormous amounts of exercise. Even the very pessimistic finding we had underestimated how many people gained it all back, because a lot of the people who gained the weight back did exercise. If they didn’t... good God." The new diet review is old news to Alberto Giacomelli, owner/lead trainer at La Jolla’s Penthouse Gym. "Everyone is different," he says, but, "Ninety-nine percent of people who come to my gym, and I am conservative, have no idea how to diet." Giacomelli tailors an exercise regimen to speed up the client’s metabolism and to keep them motivated over the long months necessary for real change. "Sometimes, it takes six to eight months before they see results. I tell them this is not fun. This is work. I guarantee you will get there, but you’ll have to sweat a lot. We have no control," he admits, "when they leave the gym." While he encourages his clients to enjoy a varied and balanced diet, Giacomelli reminds them that they’ll have to pay for it later, and he uses an ingenious method to make sure his lessons stick every time they go out to eat: he goes with them. "They send me a picture of every meal they get. I get a picture in their file, and when they come back, I tell them, ’That’s too much pasta,’ or, ’maybe no sauce at all, next time.’" — Cody Goodfellow
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