From: Top Business Degrees

So what do you think about this? $714 million per year in revenue off free child labor. Sounds like a great business plan to me!

A few years ago, we explained that the only way to achieve serious gains in your portfolio is to invest in small and ignored companies. We showed that nine out of ten of the top performing stocks from 1998 to 2007 were Micro Cap stocks (worth less than $250 million dollars) and essentially ignored by Wall Street. The first question on our Top 3 questions to ask about every stock is: Does this company have room to grow?

The fact is, if you’re looking to do really well in the stock market, you have to focus on small, ignored companies. If you just want to protect your wealth, invest in ETFs or put your money in gold. Bear in mind, however, that 95% of public-company bankruptcies were small and micro cap stocks as well. Just because a company is small doesn’t mean it’s going to get big, and it’s not an easy task to find the quality stocks among all those potential failures. You have to do your due diligence by looking into the economics of the company: does it have a low-debt, cash-rich balance sheet? Does it have a steady free cash flow and increasing profits every year? Does it pay dividends?

Also remember, on average, companies with high and increasing consumer satisfaction rates do better than the S&P 500. So once you’ve found a small company with good financials, and a product or service you understand, look into their customer satisfaction statistics. Are they high? Have they been increasing year over year? If yes, then move on to what I consider to be one of the most important and telling metrics about a company: Insider ownership.

Check this, common sense investors, the last piece of the puzzle…

Top Ten Performing Companies of the 2000s:
Medifast: 16,209%
Green Mountain Coffee Roasters: 9,211%
Hansen Natural: 7,024%
Bally Technologies: 5,975%
XTO Energy: 5,917%
Southwestern Energy: 5,776%
Clean Harbors: 4,669%
Amedisys: 4,613%
Contango Oil & Gas: 4,601%
Deckers Outdoor: 3,775%

CEO’s ownership stake in those top performers:
Medifast: 13%
Green Mountain Coffee Roasters: 51.1%
Hansen Natural: 39.1%
Bally Technologies: 1.7%
XTO Energy: 3.2%
Southwest Energy: 1.7%
Clean Harbors: 39%
Amedisys: 10.2%
Contango Oil & Gas: 10.9%
Deckers Outdoor: 36.7%

The average CEO ownership percentage for companies that went bankrupt in the 2000′s was about 5%, where the average CEO ownership percentage for the top ten performing companies during that same time was about 20%. Bear in mind this is just the CEO’s ownership percentage. Google Finance has information about all of the major insiders of a company and their levels of ownership. When a company has a management team with a high level of insider ownership, it shows that the people running the business have a tangible investment in the company’s future and they believe in what they’re doing.

But just like not every small cap company is destined to get huge, not every company with high levels of insider ownership will be successful either. It’s a powerful piece of information, one of the most important in my opinion… but its still just one piece. It’s only useful when combined with the rest of the puzzle. It’s just common sense.

From: Business MBA

Based on this infographic, if they want to grow profits, it would be in Google’s interest to 1) find a way to monetize their other products 2) reduce energy consumption or cost of energy consumption and 3) gain more cell phone market share.

Google has been notoriously bad about monetizing outside of advertising. However, with the market share that Android has gained in the cell phone industry, a simple $3 licensing fee per phone would get them over an extra billion in revenue (if my math is correct). And it is well past time that Google start making money off premium video products through their YouTube channel.

As for reducing energy consumption, I understand they are investing heavily in green energy, but how well that will pay off is to be determined.

From: The Best Colleges

In other words, 1 in every 2 law student is graduating with big debt and no law job.  And the ones who are getting jobs are often getting paid less than glamorous salaries while being saddled with back breaking debt.

And despite the current economic malaise, not all of the economists listed are bad guys.

Hat tip: Brainz

Here at the Common Sense Investor, along with the odd post on complex adaptive systems or peer-to-peer lending or the SEC, we’ve also posted a few individual stock picks and some quick guides for choosing quality companies to invest in. But I don’t think we’ve ever actually explained what a ‘stock’ is.

Well, here you go…

For your edification, we have lifted this very lovely graphic from mint.com. It explains the concept of a company’s stock in beautiful detail with pretty lines and colors and arrows and such. Click the picture to see it fullsize’d:

via mint.com

Every Wednesday at 8:00pm Eastern (5:00pm Pacific), Peter Schiff broadcasts Wall Street Unspun, which is his mid-week run-down on the market dealing with any issues making the headlines at the time. This week’s episode is one of the best I’ve heard yet, in fact, I think this episode may actually be one of the best talks on the current economic crisis that I’ve ever heard, period. Highly, highly recommended.

Initially, Peter Schiff talks about Barack Obama’s newly unveiled stimulus package. He highlights some obvious holes in that package and uses that as his launching off point. He compares the stimulus package to an individual home owner: Say you’re deep in debt, you’ve lost your job, and you’re generally in the midst of a severe financial crisis, would the solution be to remodel your house? Of course not. Obviously it would be nice to have an updated infrastructure with new roads and bridges, but this is the worst possible time to undertake that kind of activity, since we don’t have the money to do it. Read on for the rest of the episode split into 6 parts:

Schiff asks a rhetorical question that really highlights the flaw in Obama’s plan: “Why don’t governments in poor countries make their countries rich by building roads and bridges?”, Because it doesn’t work that way, obviously. The money has to come from somewhere, and that somewhere is from an already bankrupt nation. But Schiff isn’t just finding fault, he’s offering a solution. Instead of taking money and filtering it through the inefficiencies of government so we can build infrastructure, why not leave the money in the hands of the private sector so they can use it to build factories or other things that will increase our productive capacity and allow us to pay back the trillions we’ve already borrowed from foreign countries so we can actually get out of this financial mess.

Schiff uses Obama’s plan to point out the flaws of Keynesianism (aka Keynesian economics), and how we’re now moving away from a more market based economy to a centrally planned one, which could have horrifying consequences for not only the economy, but for our social freedoms as well.

In the second half of the episode, Schiff begins moving from general to specific, and starts giving advice and predictions for the next few months and years. First off, he says the bond market is going to tank on a grand scale, as in, worse than the housing bubble. The scary part is that a bond bubble bursting means the government is going bankrupt, and the only way the government has to prevent a catastrophic drop in the bond market is the rev-up production of money to buy back bonds. But here comes the really scary part: if the government turns on the printing press and prints out money, that means inflation, and inflation has the direct result of undermining the bond market and making bonds a worse investment. That cycle will cause an out of control event called hyperinflation.
The takeaway for Common Sense Investors: GET OUT OF THE BOND MARKET!

He also talks about real estate and buying a home in this market. His advice is to rent for now, since there really is no reason to buy a home. One caller near the end of the episode points out that nominal house prices will go up in a hyper-inflationary environment, or even in one with just really high inflation… but Schiff points out that real house prices will not; that means a house may go from costing $500,000 to costing $3 million in a year, but that same $3 million won’t buy as much food or gold or anything else that the $500,000 did just 2 years before.

The main takeaway for Common Sense Investors here: unless you can find a no money down deal, avoid buying a house in this economy, rent for now. If you’re looking for investments, go with commodities, go with gold, go with foreign equities, follow Schiff’s advice and you’ll make it out of this mess a wealthier person.

It’s just Common Sense.

Part 2

Part 3

Part 4

Part 5

Part 6

Michael Shermer is one of my absolute favorite science writers alive today. He’s the founder of The Skeptics Society, the Editor-in-Chief of Skeptic Magazine, writes the monthly Skeptic column in Scientific American magazine, and is adjunct professor in economics at Claremont Graduate University. He’s a phenomenal writer and speaker and a genius mind.

He wrote an op-ed column in January of 2008 called “Why People Don’t Trust Free Markets” which complimented his book, The Mind of the Market, which came out around the same time. The op-ed is fantastic and a required read for all Common Sense Investors, so we’ve reprinted it here in its entirety. Enjoy:

The new science of evolutionary economics offers an explanation for capitalism skepticism

In his magnum opus on the power of free markets, Human Action, the Austrian economist Ludwig von Mises noted: “The truth is that capitalism has not only multiplied population figures but at the same time improved the people’s standard of living in an unprecedented way. Neither economic thinking nor historical experience suggest that any other social system could be as beneficial to the masses as capitalism. The results speak for themselves. The market economy needs no apologists and propagandists. It can apply to itself the words of Sir Christopher Wren’s epitaph in St. Paul’s: Si monumentum requires, circumspice.” If you seek his monument, look around.

Capitalism may not need apologists and propagandists, but it does need a vigorous scientific and rational defense as evidenced by the fact that so many people still distrust free markets. Market solutions to social problems are generally received with skepticism. Businessmen are distrusted, corporations looked at askance, and there is a well-known resentment against those who have most benefited from markets. (As one New Yorker cartoon featuring two people in conversation reads: “I hated Bill Gates before it became so fashionable.”) Why do people distrust free markets?

Part of the answer can be found in our history. Because we lived for so long in small groups of a couple of dozen to a couple of hundred people in hunter-gatherer communities in which everyone was either genetically related or knew one another intimately, most resources were shared, wealth accumulation was almost unheard of, and excessive greed and avarice was punished. Thus, we naturally respond to a free market system in which conspicuous wealth is paraded as a sign of success with envy and anger. Call it evolutionary egalitarianism.

Throughout most of the history of civilization as well, economic inequalities were not the result of natural differences in drive and talent between members of a society equally free to pursue their right to prosperity; instead, a handful of chiefs, kings, nobles, and priests exploited an unfair and rigged social system to achieve gains best described as ill gotten.

People also have a remarkably low tolerance for economic ambiguity. Free markets are chaotic and uncertain, uncontrollable and unpredictable. Most of us have little tolerance for such environments, and we have learned to expect that social institutions such as the government will bring a level of certainty to society. People who cannot afford (or who choose not to purchase) insurance against acts of God typically expect acts of government to save them.

As well, there is well-documented liberal bias in the academy and the media against free markets. A 2005 study by the George Mason University economist Daniel Klein, for example, found that at two of America’s leading institutes of higher learning Democrats outnumbered Republicans among the faculty by a staggering ratio of 10 to 1 at the University of California, Berkeley and by 7.6 to 1 at Stanford University. Measuring political attitudes through voter registrations among faculty in twenty different departments, in the humanities and social sciences the ratio was 16 to 1 at both campuses (30 to 1 among assistant and associate professors), and in some departments, such as anthropology and journalism, there wasn’t a single Republican to be found.

In another 2005 study on “Politics and Professional Advancement Among College Faculty,” Stanley Rothman, S. Robert Lichter, and Neil Nevitte discovered that only 15 percent of those teaching at American colleges and universities describe themselves as conservative while 72 percent said they were liberal, and that figure climbed to 80 percent in such departments as English literature, philosophy, political science, and religious studies, with only five percent labeling themselves as conservative. In a 2005 publication in the Georgetown Law Journal, Northwestern Law Professor John McGinnis reviewed the faculties of the top 21 law schools rated by the 2002 U.S. News & World Report graduate-school rankings and found that politically active professors at these top law schools overwhelmingly tend to be Democrats — 81 percent contributed “wholly or predominantly” to Democratic campaigns while just 15 percent did the same for Republicans.

In a manner and potency matching academia, the bias in the media is against free market economics. A comprehensive 2005 study conducted by UCLA political scientist Tim Groseclose and University of Missouri economist Jeffrey Milyo, published in the Quarterly Journal of Economics, measured media bias by counting the times that a particular media outlet cited various think tanks and policy groups, and then compared this with the number of times that members of Congress cited the same groups. “Our results show a strong liberal bias: all of the news outlets we examine, except Fox News’ Special Report and the Washington Times, received scores to the left of the average member of Congress.” Not surprisingly, the authors discovered that CBS Evening News and the New York Times “received scores far to the left of center” and that “the most centrist media outlets were PBS NewsHour, CNN’s Newsnight, and ABC’s Good Morning America.” Interestingly, USA Today — that ne plus ultra of pop print media — was closest to political center of all newspapers.

The strongest reason for skepticism of capitalism, however, is a myth commonly found in objections to both the theory of evolution and free market economics, and that is that they are based on the presumption that animals and humans are inherently selfish, and that the economy is like Tennyson’s memorable description of nature: “red in tooth and claw.” After Charles Darwin’s The Origin of Species was published in 1859, the British philosopher Herbert Spencer immortalized natural selection in the phrase “survival of the fittest,” one of the most misleading descriptions in the history of science and one that has been embraced by social Darwinists ever since, applying it inappropriately to racial theory, national politics, and economic doctrines. Even Darwin’s bulldog, Thomas Henry Huxley, reinforced what he called this “gladiatorial” view of life in a series of essays, describing nature “whereby the strongest, the swiftest, and the cunningest live to fight another day.”

If biological evolution in nature, and market capitalism in society, were really founded on and sustained by nothing more than a winner-take-all strategy, life on earth would have been snuffed out hundreds of millions of years ago and market capitalism would have collapsed centuries ago. This is, in fact, why WorldCom and Enron type disasters still make headlines. If they didn’t — if such corporate catastrophes caused by egregious ethical lapses were so common that they were not even worth covering on the nightly news — free market capitalism would implode. Instead it thrives, but just as eternal vigilance is the price of freedom, so too must it be for free markets, since both are inextricably bound together.”

This is an excellent ReasonTV discussion about the financial bailout and the high level of frustration that the economically literate are feeling in response to it. Tim Cavanaugh has a great line where he points out that the bailout redistributes wealth from “the prudent to the profligate.” And again where he says this bailout was “perfectly designed to punish the just and reward the wicked.”

One of the major issues that frustrates economically minded people is that the media portrays them as ideologically motivated, or worse, unserious when it comes to this bailout. The media has almost wholly supported the bailout from the beginning, and the issue was portrayed by them as the government having no choice but to swoop down and clean up the “market failure” of the private sector; whereas economists and other informed people tried to explain that this bailout was just a poorly designed attempt to stop the free market from naturally adjusting to problem caused mainly by government intervention in the first place.

Despite all the negativity and frustration, Len Gilroy makes an upbeat prediction that I really hope comes true, but I fear probably won’t. He says that because of all this financial trouble, the era of cheap money is over for state and local governments. Combine that with the fact that it’s going to be near impossible politically to raise taxes and we may have the perfect storm for free market based policies. There is already a huge interest in privatization of roads and bridges and such and it’ll only increase as governments start to realize they need much more money then they have available. Hopefully, as that privatization is obviously successful, it’ll open the door for more market-based policies in different areas of government. It may be the silver lining to this, the worst economic disaster in United States history.

After a short break in the Schiff videos, here’s another where he deconstructs Stephen Leeb’s hilariously off-base comments. Only when it comes to political ideologies can a person be wrong so many times and still keep the same opinion. Remember these videos where Peter Schiff got everything right and his laughing opponents got everything wrong? Or these?

Stephen Leeb just won’t learn.