Money Minute: Penney, Martha Stewart Revise Deal; Casino Owner Probed

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As the world turns in the love triangle between Martha Stewart, J.C. Penney and Macy's. That's one of five money stories you need to know Tuesday.

Today - Season 62
Peter Kramer, NBC NewsWire via Getty ImagesMartha Stewart with host Matt Lauer on NBC's "Today" show.
J.C. Penney (JCP) and Martha Stewart Living Omnimedia (MSO) are revising their controversial marketing agreement, limiting the number of products they share. That deal has landed both companies in court on accusations that it violates an exclusive agreement Macy's has with Stewart. Macy's (M) says the changes represent a "tacit admission" that its exclusivity deal will be upheld in court.

This sounds like a movie plot, but it's for real. The owner of the famed Caesar's Palace casino in Las Vegas is under investigation for money laundering. Caesars Entertainment (CZR) confirms the probe and says it intends to cooperate with federal investigators, but it didn't have much else to say. It's not known if this had any impact on the company's decision Monday to pull out of a $1 billion casino project at a horse-racing track in Boston.

Stocks ended little changed Monday as investors held their fire ahead this morning's delayed employment report for September. The Dow Jones industrial average (^DJI) fell 7 points, the Standard & Poor's 500 index (^GPSC) was virtually flat and the Nasdaq composite index (^IXIC) gained 5 points. The tech-heavy Nasdaq is now up nearly 30 percent this year.

Shares of Netflix (NFLX) are likely to stay hot Tuesday. They've nearly quadrupled in value this year, and are set to jump some more after an upbeat earnings report. The stock has soared so much that even the company's top officials are trying to tamp down what they call "some of the euphoria." The company gained 1.3 million paying subscribers in the third quarter, giving it nearly 30 million domestic users. That puts it ahead of the long-time industry leader, HBO. Despite its growing popularity, Netflix isn't making a lot of money. It profit for the quarter totaled just $32 million -- a small fraction of what HBO makes.

And Apple (AAPL) has another well-guarded product rollout today. The widespread expectation is for an iPad makeover, probably with a bigger screen and a thinner design. The iPad mini could also get some upgrades. We're not expected any blockbuster announcements, but you never know with Apple.

-Produced by Drew Trachtenberg.

If You Only Know 5 Things About Investing, Make It These
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Money Minute: Penney, Martha Stewart Revise Deal; Casino Owner Probed

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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