Money Minute: Americans' Wealth Soars; GM Sheds 'Government Motors'

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GM finally sheds its "Government Motors" label.

The federal government has sold its remaining stake in General Motors, acquired in the 2009 bailout of the auto industry. Taxpayers lost $10 billion of the nearly $50 billion invested in GM. Still, supporters say the TARP program did exactly what it was intended to do by saving more than a million jobs in the auto industry.

As for GM, it's now free of the stigma of the government investment and the restrictions imposed by TARP. Shares of the new GM (GM) are at their highest level since they began trading three years ago.

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Are you feeling a bit wealthier? The average net worth of U.S households rose to a record high in the third quarter. Most of the gain came from stock and mutual fund prices, and the rising value of homes. This could boost economic growth going forward. If consumers feel wealthier, they're more likely to borrow and spend.

But for people who don't own their own homes, rents are going up. The reason is that more people are renting -- 43 million in all. That's up about 4 million from 2007, just before the foreclosure crisis hit.

Prices for your morning glass of OJ could also be on the rise. Wholesale prices are up because the domestic orange crop is expected to be light, partly due to the early winter freeze. The Agriculture Department revises its crop forecast Tuesday, and it could be the smallest orange crop in more than 20 years.

A growing number of American companies are offering benefits to same sex couples. A gay rights advocacy group says more than 300 get perfect scores on "corporate equality" including giants such as General Electric (GE) and Procter & Gamble (PG). Two out of three companies in the Fortune 500 now offer health benefits for same sex couples.

Here on Wall Street, the Dow Jones industrial average (^DJI) added 5 points Monday, the Standard & Poor's 500 index (^GPSC) rose 3 and the Nasdaq composite index (^IXIC) gained 6 points.

-Produced by Drew Trachtenberg.

If You Only Know 5 Things About Investing, Make It These
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Money Minute: Americans' Wealth Soars; GM Sheds 'Government Motors'

Warren Buffett is a great investor, but what makes him rich is that he's been a great investor for two thirds of a century. Of his current $60 billion net worth, $59.7 billion was added after his 50th birthday, and $57 billion came after his 60th. If Buffett started saving in his 30s and retired in his 60s, you would have never heard of him. His secret is time.

Most people don't start saving in meaningful amounts until a decade or two before retirement, which severely limits the power of compounding. That's unfortunate, and there's no way to fix it retroactively. It's a good reminder of how important it is to teach young people to start saving as soon as possible.

Future market returns will equal the dividend yield + earnings growth +/- change in the earnings multiple (valuations). That's really all there is to it.

The dividend yield we know: It's currently 2%. A reasonable guess of future earnings growth is 5% a year. What about the change in earnings multiples? That's totally unknowable.

Earnings multiples reflect people's feelings about the future. And there's just no way to know what people are going to think about the future in the future. How could you?

If someone said, "I think most people will be in a 10% better mood in the year 2023," we'd call them delusional. When someone does the same thing by projecting 10-year market returns, we call them analysts.

Someone who bought a low-cost S&P 500 index fund in 2003 earned a 97% return by the end of 2012. That's great! And they didn't need to know a thing about portfolio management, technical analysis, or suffer through a single segment of "The Lighting Round."

Meanwhile, the average equity market neutral fancy-pants hedge fund lost 4.7% of its value over the same period, according to data from Dow Jones Credit Suisse Hedge Fund Indices. The average long-short equity hedge fund produced a 96% total return -- still short of an index fund.

Investing is not like a computer: Simple and basic can be more powerful than complex and cutting-edge. And it's not like golf: The spectators have a pretty good chance of humbling the pros.

Most investors understand that stocks produce superior long-term returns, but at the cost of higher volatility. Yet every time -- every single time -- there's even a hint of volatility, the same cry is heard from the investing public: "What is going on?!"

Nine times out of ten, the correct answer is the same: Nothing is going on. This is just what stocks do.

Since 1900 the S&P 500 (^GSPC) has returned about 6% per year, but the average difference between any year's highest close and lowest close is 23%. Remember this the next time someone tries to explain why the market is up or down by a few percentage points. They are basically trying to explain why summer came after spring.

Someone once asked J.P. Morgan what the market will do. "It will fluctuate," he allegedly said. Truer words have never been spoken.

The vast majority of financial products are sold by people whose only interest in your wealth is the amount of fees they can sucker you out of.

You need no experience, credentials, or even common sense to be a financial pundit. Sadly, the louder and more bombastic a pundit is, the more attention he'll receive, even though it makes him more likely to be wrong.

This is perhaps the most important theory in finance. Until it is understood you stand a high chance of being bamboozled and misled at every corner.

"Everything else is cream cheese."
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