Money Minute: Penney Sales Continue Rise; BJ's Eyes Hess Gas Stations

Is that story real news, or an ad? That and more money stories you need to know Wednesday.

When you surf news or social media sites on the Web, are you ever confused by advertisements designed to look like news stories? Well, the Federal Trade Commission thinks it's a problem, and the agency is holding a workshop to discuss the issue. It wants to determine if new guidelines are needed to make sure these ads aren't deceptive.

J.C. Penney (JCP) is on the comeback trail. A key measure of sales in November rose by an estimated 10 percent. That's the retailer's second straight monthly gain after a long streak of declining sales comparisons. Analysts are encouraged, but still worry that J.C. Penney is sacrificing profits for heavily discounted sales.

Here on Wall Street, the Dow Jones industrial average (^DJI) fell 94 points Tuesday, the Standard & Poor's 500 index (^GPSC) lost 6 and the Nasdaq composite index (^IXIC) dropped 8 points.

BJ's reportedly wants to buy Hess gas stations
CX Matiash/AP
The company that owns BJ's Wholesale Club is reportedly interesting in buying the Hess gas station chain. Hess (HES) previously said it would consider the sale of its 1,300 stations. BJ's isn't the only potential bidder. Marathon Petroleum's (MPC) top executive recently said the Hess stations would be an excellent fit with its Speedway chain.

Watch shares of Ambit Biosciences (AMBI). They're set to plunge after the biotech company said it wouldn't ask the Food and Drug Administration for an expedited review of its leukemia treatment.

The homebuilder Lennar (LEN) has won a $1 billion award against a former partner. A jury agreed with Lennar that a California developer led a smear campaign against the company. He accused Lennar of fraud and misuse of proceeds from their joint venture.

Finally, the United Auto Workers union is considering its first hike in dues since 1967. The union is trying to deal with declining membership, rising costs and problems with its efforts to organize foreign-owned carmakers. Reuters reports the dues could rise by as much as 25 percent.

-Produced by Drew Trachtenberg.

If You Only Know 5 Things About Investing, Make It These
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Money Minute: Penney Sales Continue Rise; BJ's Eyes Hess Gas Stations

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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