Money Minute: Kmart's Black Friday Woes; Are Retail Investors Getting Ripped Off?

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Kmart is trending, but not in a good way. That and more top money stories you need know Wednesday.

Holiday Shoppers Seek Out Deals On Black Friday
Allison Joyce/Getty ImagesCustomers check out at a Kmart store in Braintree, Mass. during last year's Black Friday event.
Kmart (SHLD) just can't catch a break. Within hours of saying it would open its stores at 6 a.m. on Thanksgiving, social media sites lit up with criticism of the plan. Some angry customers even threatened to boycott Kmart for being insensitive to its workers.

The little guy is getting ripped off. The game of buying and selling stocks is stacked against you and me, the retail investors. That's the word from someone who should know, the head of the company that's in the process of buying the New York Stock Exchange. He told analysts that small investors get taken advantage of when they go make trades.

The Dow Jones industrial average (^DJI) fell 21 points Tuesday and the Standard & Poor's 500 index (^GPSC) lost 5. But the Nasdaq composite index (^IXIC) added 3 points. After the markets close Wednesday, Twitter will set the price for its IPO, which begins trading Thursday.

Tesla has hit a bump in the road. One of the best performing stocks this year is set to slide. The luxury carmaker says its quarterly loss narrowed from a year ago, and it announced plans to boost production to meet rising demand. But the company also warned that fourth quarter results will fall short of expectations. Over the past year, Tesla (TSLA) shares have soared a whopping 461 percent.

Toyota's (TM) profit soared by 70 percent and it raised its outlook for the full year. The gains were led by strong U.S. sales.

Abercrombie & Fitch (ANF) has lost some of its cool. The retailer of teen clothes reports a steep drop in sales last quarter. The company says younger consumers simply aren't spending as much. Abercrombie shares are down 20 percent this year, and falling.

And the giant meat-packing company Cargill says beginning next year it will label ground beef that contains a filler that's become known as pink slime. The controversial additive is considered safe, but it's made of meat scraps that are washed in ammonium hydroxide. And that's sparked a big yuck factor for consumers.

-Produced by Drew Trachtenberg.

If You Only Know 5 Things About Investing, Make It These
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Money Minute: Kmart's Black Friday Woes; Are Retail Investors Getting Ripped Off?

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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