Rofin-Sinar Technologies (NASDAQ: RSTI) is a speculative pick.

Rofin-Sinar is a cross between an old line manufacturer and a high-tech 'new economy' company. It manufactures lasers used by other manufacturers to weld, cut, and mark various materials.

Rofin has been in business for 30 years and is a world leader in industrial laser technology. Growth has been steady and significant over the last five years. Earnings have increased an average of 52% a year for five years and justify the above average P/E ratio of 26.5.

RSTI pays no dividend and has volatility over twice the average for listed companies, but this is a strong business.

Sadia S.A. (NYSE: SDA), a more conservative idea, is a Brazilian food producer with operations in Brazil, Argentina, Chile, Uruguay, Paraguay, and Bolivia. It is one of the largest food companies in the region. Half of its sales come from outside of South America, with Asia and the Middle East particularly large buyers.

For the nine months ended September 30 2007, Sadia's total revenues jumped 25%. Net income soared even more, up 156%. Trading a very conservative 12.57 times earnings Sadia's share price could easily double in 2008.

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For 25 years, Steven Halpern, editor of TheStockAdvisors.com, has surveyed the leading financial newsletter advisors asking for their favorite stocks for the coming year. This article is one of 100+ ideas in the Best Stocks for 2008 report.

"The commodity bull market has a long way to run, powered by explosive growth in the BRIC (Brazil, Russia, India, China) countries," says Sean Broderick, resource stocks editor for Money & Markets.

"My top conservative pick to play the broad commodities bull market is the broad-based exchange-traded PowerShares DB Commodity Index Tracking Fund (NYSE: DBC).

"As an ETF, it is like a mutual fund. However, ETFs usually have lower costs than a mutual fund and you can buy and sell an ETF throughout the day, whereas a mutual fund trades once a day.

The PowerShares DB Commodity Index Tracking Fund has a long name but a simple idea -- the fund invests in commodities: crude oil, heating oil, aluminum, gold, corn and wheat. DBC invests in that basket of commodities by purchasing futures contracts. It rebalances annually to 35% crude, 20% heating oil, and 10% to 12.5% of the other four."

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We've found ten stocks that will thrive despite - or even benefit from - the troubles facing the markets next year.

By Jon Birger, senior writer

(Fortune Magazine) -- We'll say this for the U.S. economy: It can take a punch.

Consider the blows it has absorbed just this year. The worst real estate crash since the Great Depression. Pow! Oil prices up from $50 to $90 a barrel since last January. Bam! A subprime mortgage mess metastasizing into a full-blown credit crisis, with banks swallowing billions in losses and cutting back on loans. Baff!

Yet through all the punishment, the economy has barely flinched. "I'm floored by how resilient it has been," says veteran stock strategist Ed Yardeni of Oak Associates. "Had you told me at the beginning of the year this was going to happen, I doubt I would have been very optimistic."

That's why forecasting 2008 is so difficult. History tells us that oil shocks, real estate crashes, and banking crises are harbingers of downturns. Confidence has already plunged as consumers have been pinched by rising energy prices and falling home values.

October saw another bad omen: a decline in discretionary purchases such as books and electronics. Observes Merrill Lynch economist David Rosenberg: "You have to go back to the 1990-91 recession to find a time that this trend has been so weak heading into the holiday shopping season."

Despite all that, the U.S. economy expanded 3.8% and 4.9% in the second and third quarters, respectively - up from 2.4% and 1.1% during the same periods in 2006. That's right: For all the bad headlines, the American economy appears to be getting stronger.

How can that be? The short answer is globalization. Rapid expansion in the developing world - not just in China and India but in Russia, Brazil, and Turkey, for example - has created new markets for U.S. goods and services, and a weak dollar has made them relatively cheap.

As a result, 44% of the Standard & Poor's 500 companies' revenues comes from abroad, up from 32% in 2001. S&P expects that figure to rise to 50% in 2008. Says Bob Doll, who helps manage some $1.3 trillion as chief investment officer for BlackRock: "The boom in exports is almost as big a positive as housing is a negative."

The bottom line: We think the U.S. economy will slow in 2008 but narrowly miss an outright recession. We expect the overall stock market to bounce around, as it did this year, and deliver anemic single-digit returns.

Of course, some stocks will thrive even when the market as a whole is on the ropes. After interviewing dozens of analysts and money managers and poring over reams of Wall Street research, we've identified ten stocks we believe are poised for big gains in 2008.

Five of our picks are growth companies in noncyclical industries, on the logic that in a slowing economy, investors will pay a hefty premium for superior profit improvement. These five aren't cheap - they trade at an average of 22 times 2008 profits vs. a price/earnings ratio of 14 for the S&P, according to Baseline - but they're worth it. Analysts expect their earnings to increase an average of 29% next year, vs. 6% for the S&P.

We've also identified a handful of opportunistic investments - stocks positioned to exploit the ongoing crises in finance and real estate or to rebound once the panic lifts. These are not for the faint of heart, but the opportunity is just too good to let a little apprehension (okay, a lot) get in the way.

For the record, our past Investor's Guide selections have excelled. Our ten stock picks for 2006 returned an average of 26% that year, vs.13% for the S&P. And through Dec. 3, our ten stocks for 2007 have outpaced the S&P 14% to 6%.

Now on to Fortune's best investments for 2008:

Annaly Capital Management

Annaly is a hedge fund disguised as a real estate investment trust that makes its money by investing in mortgage-backed securities. Sounds like a prescription for disaster, right? In reality, there's probably no company better positioned to profit from the ongoing mortgage crisis than this one.

What distinguishes Annaly (Charts) from its out-of-favor Wall Street peers is the fact that it doesn't take credit risk, only interest-rate risk. It buys mortgage-backed securities issued by government-sponsored enterprises like Fannie Mae and Freddie Mac; in other words, it has no exposure to subprime mortgages.

The securities Annaly owns are all guaranteed by Fannie, Freddie, or Ginnie Mae, which means they're implicitly guaranteed by the U.S. Treasury. Yes, there have been troubles at Fannie and Freddie, but trust us when we say that the value of Annaly stock would be the least of your concerns if the federal government ever allowed Fannie or Freddie to default.

What makes Annaly's business model so compelling right now is the widening gap between its borrowing costs (which are sinking as the Federal Reserve cuts rates and banks offer Annaly better borrowing terms) and the yields on the mortgage securities it holds (which haven't fallen nearly as far). In the third quarter, that interest-rate spread more than doubled, from 0.32% to 0.67%. A third of a percentage point may not sound like a lot, but it's huge when you've got a $45 billion portfolio.

This widening spread is fueling massive earnings growth - 57% in the third quarter and a projected 53% in 2008, according to analyst estimates. Schneider Value Fund portfolio manager Arnie Schneider thinks more Fed rate cuts are coming, which would juice Annaly's earnings even more.

Best of all, Annaly isn't priced like a growth stock, as it boasts a 5.2% dividend yield and trades at a mere nine times estimated 2008 earnings. Says Schneider: "It's the perfect recessionary stock."

Berkshire Hathaway

Let's dispense with the obvious. Warren Buffett, Berkshire Hathaway's illustrious chairman and CEO, is 77 years old. The line of succession remains murky. Berkshire's insurance businesses have benefited from unusually benign weather- namely, the dearth of U.S. hurricanes. And Berkshire stock has already risen 22% since August.

So why are we recommending Berkshire (Charts) now? Simple. Warren Buffett knows how to exploit panics. He bought 5% of American Express in 1963, following a financial crisis (involving vegetable oil, of all things) that had cut AmEx's stock price in half. He started buying up shares of Geico in 1976 when claim-cost miscalculations left the auto insurer teetering near bankruptcy. And he picked the pocket of financially troubled energy company Dynegy in 2002, paying $928 million for a natural gas pipeline that Dynegy had bought for $1.5 billion only months earlier.

With $40 billion in cash idling on Berkshire's balance sheet at the end of the third quarter, Buffett looks ready to plunge in should a financial company, bond insurer, or homebuilder with attractive land assets need a white knight. (Indeed, in early December, Buffett bought $2.2 billion in high-yield bonds from Texas power company TXU at a discount.)

"He's going to wait for the fat pitch and pounce," says ace value fund manager Jean-Marie Eveillard, explaining why Berkshire remains the biggest stock holding in his First Eagle Global fund, even though he believes Berkshire's market cap exceeds the value of its businesses. "The current circumstances in the economy and possibly in financial markets are exactly the kind of environment where Buffett will be able to see and seize opportunities."

Dick's Sporting Goods

Retail is tough even in the best of times. Still, if you look at the histories of America's retail category killers- Best Buy, Home Depot, Costco, Staples, etc.- there is always an inflection point at which the chain's geographic reach has not yet caught up with the proven success of its business model.

That's where Dick's Sporting Goods (Charts) is today, and it's why we think now is the time to invest in this emerging category killer. Though well established in the Midwest and Northeast - the company has grown from 61 stores to 341 in the past decade - Dick's has relatively few outposts in Southern and Western states like Florida and Texas and none in California.

Over the next seven years Dick's plans to more than double its store count, to 800. Another plus: It faces competition mostly from mom-and-pops; the top five U.S. sporting goods retailers account for only 17% of sales.

Dick's emphasizes a store-within-a-store sales approach. Each department has its own look and staff, which appeals to the enthusiast who purchases a lot of sporting goods. Then there is its innovative merchandising. Dick's has been phasing out its no-name, private-label apparel and equipment in favor of deals in which Reebok and Nike put their logos on products sold exclusively at Dick's (a strategy that analysts have dubbed "private brand" rather than "private label").

So now, for example, Nike swooshes can be found on Dick's hats, gloves, and outerwear. "What private brand does," explains Michael Baron, an analyst with Baron Growth fund, which owns 3% of outstanding Dick's shares, "is allow them to charge branded-product prices but with margins seven to eight percentage points higher." Through the first nine months of 2007, Dick's earnings per share rose 73% on sales growth of 28%. Another key barometer: Same-store sales rose at a terrific 8.6% clip in the third quarter.

What happens if the economy tanks? Industry experts say that sporting goods have proven resilient in the past. Indeed, in 2008, analysts expect a 19% increase in earnings per share. Says fund manager Thomas Ognar, who has 3% of his Wells Fargo Advantage Growth fund in Dick's: "People cut back on a lot of other things before not buying cleats for their kids."

Electronic Arts

There's a reason you won't find any major technology companies among our 2008 stock picks. More than 70% of tech purchases are made by businesses, according to tech tracker IDC, and spending is sagging. Cisco CEO John Chambers recently warned of "dramatic decreases" in orders from banks.

Still, if there's one tech niche that should be immune to a slowdown, it's videogames. Fueled by the success of the Nintendo Wii and Microsoft Xbox 360 consoles, videogame sales rose 39% in October, according to the NPD Group, after a 64% rise in September. "I can't tell you if corporate spending falls off a cliff or hangs in there in 2008," says Eric Fischman, portfolio manager of the MFS Emerging Growth fund. "But I can tell you with a high degree of confidence that videogame sales are going to be up."

Fischman's top game pick is a turnaround story - Electronic Arts (Charts). The stock has stagnated since 2004, with earnings falling and critics charging that EA was too reliant on aging franchises like Madden NFL. But things started to look up in early 2007 when ex-president John Riccitiello returned as CEO after a three-year stint with a venture capital firm.

Riccitiello reorganized EA into four divisions (trimming 4% of the workforce in the process) and spent $860 million to acquire BioWare and Pandemic, two smaller game studios known for producing the kind of innovative action-adventure and role-playing games (such as BioWare's hit Baldur's Gate) long missing from EA's lineup. "By themselves, BioWare and Pandemic won't make us market leaders in either action-adventure or RPG, but it takes us from nowhere to being in the top two or three," says Riccitiello.

EA has also worked hard at playing catch-up in the red-hot Wii market. It's now the No. 2 developer of Wii games, behind only Nintendo. The result: Analysts expect earnings to rise 76% next year. "Compared to where they were a year ago," says Fischman, "it's like night and day."

Genentech

Once the darlings of biotech investors, Genentech shares have been in a prolonged slump since topping out at $96 in 2005. But the company itself remains a standout, and recent news provides the opportunity to buy the shares at a discount.

On Dec. 5, the stock was pounded, plunging 10% in a few hours. The reason: An FDA advisory panel voted against expanding the use of Avastin - a blockbuster Genentech (Charts) drug already approved to treat colon and lung cancer- for breast cancer.

The market overreacted. The advisory panel didn't dispute the core claim that Avastin is effective in fighting breast cancer, notes Sanford C. Bernstein & Co. analyst Geoffrey Porges. "What you heard from the panel," says Porges, "is not that this drug doesn't work in this indication but that we had an imperfect study, one with a lot of missing data." (As it happens, that study was enough to persuade the European authorities to endorse Avastin for breast cancer.)

Genentech has two Avastin studies in the works that are more comprehensive and that Porges believes will help it win FDA approval, eventually leading to a doubling of Avastin annual sales, now $2.5 billion, by 2011.

He arrives at that estimate via a recent Bernstein survey of 108 oncologists. The survey suggests that 80% of oncologists are already prescribing Avastin to treat some later-stage breast cancer, and that that percentage would rise to nearly 100% once there is FDA approval (which Porges now expects to come in early 2009).

The survey also indicates doctors' utilization of Avastin will double, from between 15% and 20% of their breast cancer patients today to between 35% and 40%. Says Porges: "I'd say the valuation upside is even more compelling now than it was before, though you might have to wait until the second half of next year to get that return."

Even with the FDA setback, Genentech is still expected to grow earnings 18% next year. And it's not as if Avastin is the only thing Genentech has going for it. There are early indications that its cancer drug Rituxin holds hope for treating autoimmune diseases like multiple sclerosis and lupus.

Tom Marsico, the growth fund manager whose eponymous firm owns 3.5% of the biotech's shares, is excited about Herceptin - considered a miracle drug for certain types of breast cancers - and Lucentis, which treats macular degeneration and might one day be used for vision loss related to diabetes. "What you're really investing in here," says Marsico, "is the premier pharmaceutical company in the world as far as innovation is concerned."

General Electric

CEO Jeffrey Immelt has been leading a successful makeover at General Electric, though you wouldn't know it from GE's flaccid stock price. Our bet is that in a stormy market investors will gravitate toward the ultimate blue chip and finally give Immelt the credit he deserves.

Since replacing Jack Welch six years ago, Immelt has sold off laggard operations such as insurance and plastics, putting more emphasis on manufacturing and infrastructure businesses. The timing has been excellent. Though achieving double-digit earnings growth will always be a challenge for a company so big and diversified, GE (Charts, Fortune 500) seems well positioned to slough off whatever economic challenges may exist in the U.S.

The industrial and infrastructure businesses - which include aircraft engines, locomotives, water-treatment and desalinization plants, green energy (wind turbines and solar panels), and not-so-green energy (coal power turbines and coal gasification) - have all been reaping the rewards of the global economic boom. Half of GE sales now come from overseas.

The infrastructure divisions now account for 34% of total GE revenues, and they're growing at a 17% annualized rate. Better yet, from a shareholder perspective, these businesses are exactly the kind of "late cycle" performers that are awarded higher valuations when economic growth slows.

"Power, water, wind - all those infrastructure businesses are coming together a lot faster than anybody anticipated," says Bob Turner, founder and chief investment officer of Turner Investment Partners, a growth-fund shop with some $27 billion under management (including 8.6 million shares of GE as of Sept. 30).

About half of GE's earnings come from lending and investing, a fact that has weighed on the stock. But Immelt- who's quick to point out that GE has no exposure to troubled assets like collateralized debt obligations (CDOs) - sees GE's financial services exposure as an asset in today's market.

"These are classically the times where our financial service businesses do very well," he says. "This is a great time to be triple-A rated. We have a good cost of funds and availability of funds, and there are things that might have been trading for a 10% or 15% return six months ago that are going to be a 25% to 30% return today."

Goldman Sachs analyst Deane Dray argues that GE's business mix merits a P/E of 17 - a 10% premium to the S&P 500 and up from 15 today. Based on Dray's 2008 earnings estimate of $2.45 a share, a 17 P/E translates to a stock price of approximately $45- which also happens to be Turner's GE target. "You've got the best company in the world growing earnings 12% and a stock with a 3% dividend yield," says Turner. "You could be looking at a 25% return."

Jacobs Engineering

Normally we wouldn't recommend a stock that has doubled since the start of '07. But as we said, in a slowing economy, you want to own companies that can demonstrate superior earnings growth regardless of what's happening around them. Jacobs Engineering is such an enterprise.

Jacobs (Charts, Fortune 500) is one of the fastest growers in an exploding industry: construction and engineering. The company is hired to design and build oil refineries, biodiesel plants, hospitals, bridges, and water-treatment centers.

"These are the strongest markets we've seen in 30 years," says Jacobs CEO Craig Martin. Earnings jumped 39% in the fourth quarter of the fiscal year ended Sept. 30. That makes the company's 26 P/E look reasonable, especially since Jacobs should maintain a 35%-plus growth rate into 2008: It has a $13.6 billion backlog of orders (up 39% from the year before).

"From a global standpoint, the amount of infrastructure spending that's going to occur in coming years is staggering," says David Scott, manager of the Chase Mid-Cap Growth fund, which counts Jacobs as a top-five holding. "As the premier company in its field, Jacobs sits squarely in the middle of that boom."

Merrill Lynch

Question: What do you call it when an $8 billion asset writedown translates into a $30 billion loss in market cap? Answer: an overreaction. Yes, Merrill's shares deserved a punishment for the firm's mortgage-related bungling. But the public flogging has far exceeded the transgression, which is why smart investors should buy this stock before everyone else comes to their senses.

Even if Merrill (Charts, Fortune 500) writes down another $6 billion in the fourth quarter, as S&P analyst Jeff Sexton recently predicted it will, stocks are valued on future earnings. There's little reason to believe this will have a big effect on 2008 profits, which analysts estimate at $7.68 a share. That means Merrill is trading at a mere eight times 2008 earnings (with a 2.4% dividend yield).

Why are we so confident that the mortgage debacle won't bleed into 2008? Two reasons. The first is Merrill's new CEO, John Thain, formerly CEO of the New York Stock Exchange and Goldman Sachs co-president. Thain used to run the mortgage desk at Goldman, and it's hard to believe he would have taken the Merrill job if the problems were worse than they appeared to be. "You know he did his due diligence," says Anton Schutz, manager of the Burnham Financial Services fund.

The second reason is that financial panics are almost always overblown. In the case of CDOs and other mortgage-backed assets, the problem for Merrill, et. al was not that the mortgages underlying the securities all went bad.

What happened is that the secondary market for these securities evaporated, forcing the institutions holding them to mark down their value. When this market bounces back, as surely will happen, Merrill stands to post sizable gains as it writes up the same assets it was forced to write down. "I've seen my share of credit crises," says Larry Puglia, manager of the T. Rowe Price Blue Chip Growth fund and himself a former bank analyst. "And absolutely that could be the case."

Petrobras Energia

We're on record as saying that $95 a barrel is not a sustainable price for oil. Yet The Hottest Fund Manager in America - a.k.a. CGM's Ken Heebner- now has us hedging our bets.

For those unfamiliar with Heebner, understand that his stock picking over the past eight years has been genius (as it has been for much of his 30-year career). He made a bundle short-selling tech and telecom stocks in 2000. He bet big on homebuilders in 2001 only to get out just before they crashed. He plowed his homebuilder profits into energy stocks in 2005 and eventually doubled down on commodities with a big bet on copper.

The result: His CGM Focus fund was up 66% through early December - while juicing his returns with short positions on Indymac and Countrywide Financial, mortgage lenders whose stocks have been circling the drain.

With that kind of track record, we listened when Heebner laid out an argument that $100 oil is not only coming but will be here to stay. "There is still strong growth in Latin America, China, India, and a host of smaller countries like Poland and Thailand," he says.

That means a need for some 1.5 million more barrels of oil a day. The problem, Heebner explains, isn't just finding another 1.5 million barrels; it's finding them even as some of the most productive oil fields in the world are declining.

Heebner, who is a fanatical researcher, questions the conventional view that OPEC has enough spare capacity to fill much of that void. Heebner cites one Saudi Arabian source whom he declines to name who asserts that output at Ghawa r- a legendary Saudi field that produces about 6% of the world's oil - is declining at 9% a year. (The Saudi authorities vociferously dispute this.)

"So I'm connecting all the dots," Heebner says. "It's a tight situation to start with, but add to that a loss of a million barrels a day for the Saudis, and suddenly it gets very interesting on the upside for the price of oil."

That brings us to Petrobras (Charts), Brazil's largest oil company and the stock Heebner thinks is the best way to play oil right now. With petroleum prices so high, a big risk for oil companies is that host countries will demand a bigger and bigger share of the profits in the form of taxes or royalties. "One way you can avoid this," says Heebner, "is if the government owns half the company you've invested in. That's Petrobras."

What we like about Petrobras is that it's cheap enough that it can be a winning investment even if Heebner is proven wrong about $100 oil: The stock trades at eight times 2008 earnings (which are expected to rise 32%). And to top it all off, the company just announced a huge find offshore from Rio de Janeiro, a field with up to eight billion barrels of recoverable oil.

St. Joe

We have no idea whether the Florida real estate market has hit rock bottom. What we do know is that eventually it will bounce back. Demographics demand it, with the Census Bureau projecting a 33% population increase for Florida- the equivalent of six million new residents- between now and 2020.

And when Florida real estate does rebound, investors will be kicking themselves for not recognizing today's $28 stock price for St. Joe Co (Charts).- Florida's largest private landowner - as a rare opportunity. The stock traded as high as $82 in July 2005.

At $28, says Third Avenue Real Estate Value fund manager Michael Winer, whose firm owns 20% of St. Joe shares, "this is a fire-sale price that basically assumes the Florida market will never come back."

The way to value St. Joe isn't on its current earnings (which are awful) but on its land holdings. The company owns 710,000 acres of Florida real estate, mostly in the Panhandle region, 310,000 of which are situated within ten miles of the coast. The stock market is now valuing St. Joe's property at the equivalent of $3,700 an acre. Winer says a "fire-sale value" would be $5,000 an acre. Keefe Bruyette & Woods analyst Sheila McGrath puts the fair value at $7,200, "at least."

Moreover, St. Joe's Panhandle stronghold looks as though it will recover faster than the overall Florida market. In Panama City, for example, the number of home sales increased 4% between October 2006 and October 2007, vs. a 29% decline statewide.

McGrath sees another bullish indicator in the just-begun construction of a new airport in Panama City that, unlike the old one, will support commercial jets. The airport will give a huge boost to the local economy, she contends, much as the opening of Fort Myers's new airport in 1983 boosted real estate and tourism in southwest Florida. "In the short term, there is some headline risk," she says. "But all in all, I think St. Joe is ridiculously cheap."

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Pay your mortgage or invest? Buy or lease a car? Take Social Security now or later? For the answers, Money Magazine's Janice Revell runs the numbers.

By Janice Revell, Money Magazine

December 11 2007: 11:17 AM EST

(Money Magazine) -- As you invest your money, shop for a home or tackle any one of the many financial decisions you have to make over your lifetime, do you sometimes wish you'd paid more attention in math class? Do you find yourself having to "run the numbers" and wondering how?

To help, we've taken six common financial quandaries and done the math for you. As you'll see, the solution isn't always black and white, and the "right" answer may depend on things that you can never know for sure, like your tax bracket in 2020 or how much your investments will grow.

Plus, at times emotional considerations may tip the balance. Even if the math favors buying stocks over prepaying your mortgage, say, you may simply sleep better being out of debt. So this guide will walk you through the caveats as well as the calculations. Use it to navigate some of your financial life's trickiest questions and come up with your best call.

Pay off a credit card OR fund your 401(k)

You should do both. If you can't, pay off the plastic first.

In an ideal world, you'd wipe out your costly debts and save for retirement. But in the real world, you may not have enough cash to do both at the same time. Of course, you must pay at least the minimum on your credit card every month. So the question is, Do you put the rest of your available cash in your 401(k) or devote it all to your credit card?

Strictly by the numbers By paying off credit-card debt, you get a guaranteed rate of return equal to your interest rate (the average is 14 percent today). But if your employer matches your 401(k) contributions, that's a 50 percent return (assuming the typical 50¢-to-the-dollar match on the first 6 percent of your salary).

Hard to beat. Or is it? The 50 percent match is a one-time gift; the 14 percent interest will compound every year. At some point the cost of that interest will overtake 50 percent. So if you have a big credit-card balance, attack that first.

Here's how that could play out if you're deciding what to do with $250 a month. With a $5,000 credit-card balance at a 14 percent rate, your minimum payment is $125 a month.

Suppose you put the rest in your 401(k). Because you don't pay taxes on that contribution, you can actually invest $174 a month (assuming a 28 percent tax rate). Keep paying $125 a month on your credit-card balance, and you'll need 55 months to wipe it out. During that time if you earn 8 percent annual returns and get the standard 50 percent match you'll amass $17,271 in your 401(k).

If you ignore the 401(k) for a while and instead plow your entire $250 toward the credit card, you'll pay it off in just 23 months. Then you could devote all your spare cash to your 401(k). By the end of the original 55 months, you'd have $18,515 in your plan. The one-at-a-time approach beats splitting your money because 55 months of paying 14 percent interest outweighs the 50 percent match.

• But wait Suppose your credit-card debt isn't that big, and you can pay it off in just a couple of years even if you split your cash. Great. Go ahead and fund both goals. You'll get the benefit of the 50 percent match.

• You do the math To see how long it would take you to pay off your credit cards, use the calculator at Bankrate.com.

• Beyond the math Good savings habits are important too. If by putting off funding your 401(k) you'll never get around to it, work on both goals at once.

• The bottom line If you have a big credit-card balance, wipe it out before you open a 401(k).

Save in a Roth 401(k) OR a regular 401(k)

Don't miss this new chance to lock in tax-free retirement income.

Wish you could forever shelter your retirement savings from taxes, but you make too much to contribute to a Roth IRA? With the recent arrival of the Roth 401(k), you may have, or may soon be getting, a second chance at tax-free income.

Grab it. With a traditional 401(k) you invest pretax dollars and pay taxes when you withdraw your money; with the Roth version you pay taxes on what you put in but nothing on your withdrawals.

About a quarter of employers have rolled out this option, and a majority of plans will likely offer it by 2009. Unlike a Roth IRA, which is off limits in 2008 once your modified adjusted gross income hits $169,000 (as a couple), a Roth 401(k) has no income caps.

Strictly by the numbers Let's say that you contribute the maximum of $15,500 to your 401(k) and you're in the 28 percent tax bracket. Assuming an 8 percent annual return, you'll end up with $72,245 tax-free in 20 years with a Roth.

If you go with the traditional 401(k) instead, you'll also end up with $72,245 in 20 years, but you'll pay taxes on the withdrawals. At the same 28 percent tax rate, you'd be left with $52,016 you could actually spend.

When you fund the traditional 401(k), however, you shelter $15,500 from taxes. But even if you invest that $4,340 tax savings outside your plan, you'd have to earn well in excess of 8 percent a year to equal your Roth total after taxes.

• But wait Won't your tax bracket drop once you're no longer working? Don't count on it. If you're just starting your career, you'll almost certainly be earning more in 40 years. Even if you're mid-career, you can't assume your tax bracket will plummet.With federal tax rates currently at their lowest levels in decades and the federal deficit growing, it's not hard to imagine Congress raising taxes between now and your retirement. Assume a lower bracket only if you're near retirement and know your tax rate will fall.

• You do the math Use the Roth 401(k) calculator at Dinkytown.net.

• Beyond the math A regular 401(k) has one thing going for it: the up-front tax break. That's why you'll see your disposable income shrink if you switch to a Roth. But for the regular 401(k) even to come close to the Roth as a savings vehicle, you'd have to invest the extra cash that it put in your pocket. Would you?

• The bottom line Unless you are on the verge of retiring and know your income will drop, the Roth wins.

Lease a car OR buy a car

Buying costs less if you own your car till it drops.

With leasing, you always drive a shiny new car, and your monthly payments are lower. So why would you buy?

Strictly by the numbers A 2008 Toyota Camry will run you just under $27,000 (including taxes and fees). Buy one and finance it with a no-money-down, five-year loan at 6.9 percent (today's average), and your monthly payments will be $526. Over five years, you'll spend $31,560. Say you instead pay $1,000 up front for a five-year lease. Your monthly payment will be $415. At the end of five years, you'll have spent $25,900.

So leasing wins? That's not the full story. If you buy a car, it'll be worth something once you've paid off the loan. Your Camry would fetch about $10,000 after five years, according to estimates by Edmunds.com. That cuts the out-of-pocket cost to $21,560.

• But wait What if you really want a new car? In that case, the gap narrows. Take out a three-year loan on the Camry and your monthly payments would spike to $821, for a total of $29,556. If your three-year-old Camry sells for $14,000, your net cost drops to $15,556.

If you leased, though, your payment would be $485 a month, putting an extra $336 in your pocket compared with the loan. Invest that $336 in a money-market fund paying 4.5 percent, and you'd earn $589 after taxes in three years, assuming a 28 percent tax bracket. Factoring that in, your total lease cost would be $17,871.

Also, the Camry holds its value well. With models that don't, the manufacturer often sweetens the deal by inflating the car's assumed value at the end of the lease term. If you buy the same car, you won't make that much when you sell it, which could tilt the scales in favor of leasing.

• You do the math Use the calculator at Edmunds.com.

• Beyond the math Leases come with mileage restrictions, typically 12,000 miles a year. Plus, if you ding a leased car, you'll get dinged with fees.

• The bottom line Over the long term, buying costs you less.

Prepay your mortgage OR invest

The feel-good choice isn't necessarily the smart choice.

When some extra cash comes your way, it's tempting to put it toward your mortgage. You'll save on interest and pay off your house earlier. Buying stocks, on the other hand, feels like a risky leap into the unknown, especially now.

Strictly by the numbers Paying off your mortgage or any loan is an investment, and your return is essentially the interest rate on the loan. If you have 25 years left on a 30-year mortgage with a fixed rate of 6.2 percent and you deduct your interest payments on your taxes, you'll earn 4.5 percent by prepaying the loan (assuming you're in the 28 percent tax bracket).

Now let's say you invest your spare cash in stocks instead. You'll pay a 15 percent tax rate on your long-term capital gains and dividends. So to beat the 4.5 percent return you'd get from prepaying your mortgage, you'd have to earn just 5.3 percent a year on your stocks before taxes.

The odds of your doing that over the 25-year remaining term of your mortgage are excellent: Historically, a portfolio of 80 percent stocks and 20 percent bonds has returned 7.5 percent a year after taxes.

• But wait Paying down the mortgage earns you a risk-free 4.5 percent. That's as good as you'll do with Treasury bonds. True, and if you are investing for a near-term goal and don't want to take any risk, you can make a stronger case for prepaying your mortgage. But if you are investing for a goal that's more than a decade away, you can and should take more risk for a chance at a higher return.

• You do the math To run the numbers on how much money you could end up with by investing, use the savings calculator at CNNMoney.com. To see how much interest you'd save by prepaying your mortgage, use the payoff calculator at Dinkytown.net.

• Beyond the math Of course, all that mortgage debt may be keeping you awake at night, especially if you are worried about losing your job or you're approaching retirement and hope to live on less. You'd be grateful to be rid of that major monthly bill sooner. In that case, prepaying your mortgage starts looking better.

Remember, though, that by prepaying your mortgage, you are reducing your liquid assets. If you suddenly need money, it's easier to sell a mutual fund than it is to pull cash from your home, and you can always pay off your mortgage later with the money you invest now.

• The bottom line Investing wins.

Buy a home OR rent a home

Even in today's crummy market, buying can beat renting if you're in for the long term.

You're relocating, or you're downsizing so you can harvest some real estate wealth. Do you buy right away or rent and wait out the housing bust? To get your answer, consider your monthly expenses, what you'd do with the profits from your old home if you didn't buy and your time horizon.

Strictly by the numbers If you plan to stay put for at least a decade, buying wins, even if your monthly cash flow is more flush with renting. Over time, rising prices reward home ownership.

Let's say you're 65 and own a $350,000 home in Edison, N.J., mortgage-free. You're moving to the warmer climes of Albuquerque, where similar homes go for $175,000. After commissions and closing costs on both sales, you'll net $152,000. Buy a fixed immediate annuity with that money, and you and your spouse will get $10,500 a year for life.

What if you instead decided to rent in Albuquerque? With the $329,000 you'd clear on the sale of your New Jersey home, you could buy an annuity that pays about $23,000 a year. Even after spending $6,500 a year more in rent than you'd pay in property taxes and upkeep, you'd be ahead by $4,250 a year after taxes.

But if you had bought a home, you can cash in on any future price gains. If you stayed in the new house for 10 years, the price would have to increase by 3.3 percent a year for buying to beat renting (assuming you invest the extra money you would have spent on rent). That's a low bar considering that home prices nationally increased by an average of 6.4 percent a year between 1963 and 2005, according to the research firm Winans International.

• But wait What if housing prices keep tanking? No question, that could happen. That's why you need a long time horizon to ride out the ups and downs. Between 1963 and 2005, the worst 10-year home-price return was 2.5 percent.

• You do the math Use the Rent vs. Buy calculator at Finance.cch.com.

• Beyond the math Owning has other benefits: the comfort of knowing that you'll never be forced to move by your landlord; the freedom to redo your kitchen in any way that strikes your fancy. On the other hand, renting can spare you the onerous upkeep that comes with maintaining a home.

• The bottom line Buying is best as long as you're confident you'll be staying put for several years.

Take Social Security early OR late

Most retirees should hold off four years for the bigger payout.

Collecting Social Security at age 62 cuts your annual benefit by about 25 percent compared with what you'd get if you waited until full retirement age that's 66 if you were born from 1943 to 1959, or 67 if you were born in 1960 or later. To do the math, you need to consider whether you expect to live a long life.

Strictly by the numbers Say you've just turned 62 and qualify for $17,280 a year now or $23,772 at 66 (in today's dollars). Start early and you'll have collected $69,120 by the time you reach 66. Wait, and higher payments will make up for those missed years in 10½ years.

If you live until at least 76½, postponing your benefits was worthwhile. The odds are in your favor: According to the Social Security Administration, the typical 62-year-old man should live until 80½, while the life expectancy for a 62-year-old woman is 83½.

But wait When you collect a Social Security check at 62, that's $17,280 you won't have to withdraw from your IRA. Add in the extra tax-deferred growth (assuming 5 percent returns), and your break-even point moves out by three years to age 79½. Even then, odds are you'll live that long.

The math can get even more complicated if you're married. According to new research from Boston College's Center for Retirement Research, the best strategy for many couples is for the wife to take Social Security at 62 and the husband to wait. The reason is that men, on average, earn more and die younger. In this scenario, a wife would take her benefit at 62 and inherit her husband's larger check later.

Finally, waiting to take Social Security assumes you can. Surveys show that 40 percent of retirees are forced into early retirement, through either downsizing or health issues.

You do the math Get a more precise handle on your break-even age with the Social Security Administration's Quick Benefits calculator at ssa.gov/OACT/quickcalc/.

The bottom line If you're healthy and don't need the cash, wait.

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Ways You Can Reduce Your Risk and Protect Your Assets

Source : http://beginnersinvest.about.com

The financial markets are nutty. How’s that for a basic truth? To give you an example from my own life: One of the companies in which we are currently acquiring shares is literally trading for less than the cash the business has in the bank! These situations are relatively rare, but it goes to show that an undervalued stock can get even more undervalued, regardless of the irrationality of it. Sometimes this happens because investors panic, sell the mutual funds in their 401k to switch to cash, forcing otherwise good money managers to liquidate their shares of great companies, driving the prices down further. That’s why one of the 20th centuries’ greatest economists made the very wise observation that markets can remain irrational far longer than you can remain solvent.

That’s why I’ve put together a short list of five things you can do that might help you avoid getting creamed when Wall Street loses its mind.

1. Don’t borrow money to buy stock

Unless you are exceptionally liquid, or have substantial resources outside of your brokerage account, when you go into debt to acquire an investment you are taking on a partner of sorts. The problem with this approach is that the decision when to sell is no longer up to you and, as the folks at Tweedy Browne have pointed out in their past letters, they are apt to panic sooner than you. They are going to have a different incentive system than you are – the upside for them is the interest rate you pay, which is probably not ridiculously high – but the downside is a complete loss of the money they lent. Therefore, when things start going south, they are not concerned with your potential loss or the gain that you could be giving up in the process by selling out an inopportune time, rather they are going to do whatever it takes to make sure you don’t lose any of their capital.

In our case, we own a collection of cash generators that produce operating income from their regular daily activities. In exceptional cases, I may begin acquiring positions utilizing some small degree of leverage, and as the business deposits are electronically sent to the brokerage firm, these balances are wiped out in the ordinary course of our banking life. For most people, they don’t have expanding enterprises or tons of excess liquidity sitting around so it’s not wise.

2. Realize that you don’t know it all.

In the financial markets, overconfidence kills. You could be right nine times out of ten, but if you go full-throttle, all-in for each and every one of your positions, it only takes that one mistake to wipe out your capital. When the market does turn, not only will you be unable to participate, you will be forced to suffer the agony of watching all of the things you that knew were cheap trade at far higher levels. This tragedy beset no less a giant than Benjamin Graham himself when he risked his own capital, plus some borrowed funds, buying up shares in the beginning of what was destined to become the Great Depression. He was buying companies at very attractive prices, but the complete devastation that the markets suffered caused healthy enterprises to sell for pennies on the dollar with price-to-earnings ratios of less than one or two! Yes, it was the worst economic time in roughly 650+ years, but that would have been little comfort if you were the one destitute on the street because of your overconfidence.

In other words, admit to yourself that you don’t know everything and be on the lookout for times when you are risking more than you can handle if the stock exchanges were to close for ten years.

3. Be on the lookout for six-sigma events or “black swans”

What if a nuclear bomb went off in one of the world’s major financial centers tomorrow? How about if an earthquake caused a tsunami that wiped out parts of southern California? What would happen to your personal portfolio, your job, or your property? You need to always be on the lookout for correlation. If, for example, you live, work, and invest all of your money in New York based firms, a localized disaster could destroy your life. Good insurance executives are acutely aware of this sort of unchecked and unrecognized correlation, but many people blithely go through their own lives without realizing that if they were to lose their job because of a hurricane, the banks in the region may be closed.

Of course, I’m not advocating paranoia here, just a healthy dose of risk management. There’s a reason that my family and companies maintain multiple banking, brokerage, and insurance relationships. Take Charlie Munger’s advice and simply ask yourself: What could go wrong? Then figure out how to protect yourself from those financial events.

4. Look for hidden landmines in a company’s financial statements

Airlines looked wonderfully profitable back before deregulation. Construction firms appeared to bring owners fountains of cash before asbestos. Textiles once made shareholders very rich. Look for where you think capitalism is going to take away major sources of wealth. Personally, it is my own opinion that I’d be nervous owning shares of video rental chains given that it appears the Internet will make digital delivery of content the wave of the future – why drive to a store when you can simply click a button to see the newest Hollywood blockbuster? Could I be wrong? Absolutely. But in my own assets, that’s not a risk I’m willing to take.

On the same note, you should look for hidden assets.

What if you found a chain of video rental stores that owned the real estate? In that case, you could find a company that was trading at a going-out-of-business price yet get far more value because of these sources of value that aren’t factored into the price by shareholders, analysts, or other professionals.

5. Never invest unless you have a backup, emergency source of liquidity

No one knows what tomorrow brings or holds. Financially, if you want to remain on stable footing in good times and bad, it is wise to maintain a backup source of liquidity, preferably liquid cash, that can be immediately and unquestionably accessed in the event of an emergency. What if a car hits you? Or you lose your job? Or find out that your employees have been stealing from you and your vendors haven’t been paid? Or you come home to find your spouse is leaving you and they have already drained the joint accounts? Regardless of the situation, prudence dictates it wise to immediately, and unquestionably, have the ability to solve the problem. For many people, a pristine credit score along with a personal line of credit should be sufficient.

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According to Research, Stocks Generate Higher Real Returns than Real Estate

Source : http://beginnersinvest.about.com

Buying a primary residence is probably the single best decision someone can make for their financial future. However, when you get into second homes, vacation houses, rental properties, commercial buildings, and raw land held for potential appreciation, you are playing a whole new ball game. That’s because over long periods of time, the real returns (net of inflation) offered by common stocks has crushed those available by real estate ownership.

Yep. You read that right. Americans have become so enthralled with ownership of real estate that they often don’t realize a property increasing in value from $500,000 to $580,000 within five years, after backing out the after-tax interest expense on the mortgage, additional insurance, title costs, etc., doesn’t even keep pace with inflation! That $80,000 gain isn’t going to buy you any more goods and services; the same amount of hamburgers, swimming pools, furniture sets, grand pianos, cars, fountain pens, cashmere sweaters, or whatever else it is that you may want to acquire.

Assuming a full mortgage at 6.25%, during those five years you would have paid $151,401 in gross interest, or roughly $93,870 after the appropriate tax deductions (and that assumes you are in the top brackets, the most favorable case.) Your mortgage balance would have been reduced to around $466,700, giving you equity of $113,300 ($580,000 market value - $466,700 mortgage = $113,300 equity.) During that time, you would have shelled out $184,715 in payments. Factoring in property care, insurance, and other costs, your gross out-of-pocket expenses would have been at least $200,000.

This should illustrate a fundamental principle all investors should remember: Real estate is often a way to keep the money you would have otherwise paid in rent expense, but it is not going to likely generate high enough rates of return to compound your wealth substantially. There are, of course, special operations that can and do generate high returns on a leveraged basis such as contractors with a low cost basis buying, rehabbing, and selling houses, hotel designers creating an exciting destination in a hot part of town (it must be pointed out that in this case, the wealth creation is coming not from the real estate, but from the business – or common stock – that is created through hotel operations), or storage units in a town with no other comparable properties (although, again, the real wealth comes not from the real estate but from the business that is created!)

What caused this great real estate myth to develop? Why are we duped by it? Continue reading for insights, answers, and practical information you may be able to use.

1. To Many Investors, Real Estate Is More Tangible than Stocks

The average investor probably doesn’t look at his or her stock as a fraction of a real, bona fide business that has facilities, employees, and, one hopes, profits. Instead, they see it as a piece of paper that wiggles around on a chart. With no concept of the underlying owner earnings and the earnings yield, it’s understandable why they may panic when shares of Home Depot or Wal-Mart falls from $70 to $33. Blissfully unaware that price is paramount – that is, what you pay is the ultimate determinant of your return on investment – they think of equities as more of a lottery ticket than ownership, opening The Wall Street Journal and hoping to see some upward movement.

You can walk into a rental property; run your hands along the walls, turn on and off the lights, mow the lawn, and greet your new tenants. With shares of Bed, Bath, and Beyond sitting in your brokerage account, it may not seem as real. Even the dividend checks that would ordinarily be mailed to your home, business, or bank, are often now electronically deposited into your account or automatically reinvested. Although, statistically over the long term you are more likely to build your net worth through this type of ownership, it doesn’t feel as real as property.

2. Real Estate Doesn’t Have a Daily Quoted Market Value

Real estate, on the other hand, may offer far lower after-tax, after-inflation returns, but it spares those who haven’t a clue what they’re doing from seeing a quoted market value every day. They can go on, holding their property and collecting rental income, completely ignorant to the fact that every time interest rates move, the intrinsic value of their holdings is affected, just like stocks and bonds. This mistake was addressed when Benjamin Graham taught investors that the market is there to serve them, not instruct them. He said that getting emotional about movements in price was tantamount to allowing yourself mental and emotional anguish over other people’s mistakes in judgment. Coca-Cola may be trading at $50 a share but that doesn’t mean that price is rational or logical, nor does it mean if you paid $60 and have a paper loss of $10 per share that you made a bad investment. Instead, the investor should compare the earnings yield, the expected growth rate, and current tax law, to all of the other opportunities available to them, allocating their resources to the one that offers the best, risk-adjusted returns. Real estate is no exception. Price is what you pay; value is what you get.

3. Confusing That Which Is Near with That Which Is Valuable

Psychologists have long told us that we overestimate the importance of what is near and readily at hand as compared to that which is far away. That may, in part, explain why so many people apparently cheat on their spouse, embezzle from a corporate conglomerate, or, as one business leader illustrated, a rich man with $100 million in his investment accounts may feel bitterly angry about losing $250 because he left the cash on the nightstand at a hotel.

This principle may explain why some people feel richer by having $100 of rental income that shows up in their mailbox every day versus $250 of “look-through” earnings generated by their common stocks. It may also explain why many investors prefer cash dividends to share repurchases, even though the latter are more tax efficient and, all else being equal, result in more wealth created on their behalf.

This is often augmented by the very human need for control.

Unlike Worldcom or Enron, an accounting fraud by people whom you’ve never met can’t make the commercial building you lease to tenants disappear overnight. Other than a fire or other natural disaster, which is often covered by insurance, you aren’t going to suddenly wake up and find that your real estate holdings have disappeared or that they are being shut down because they ticked off the Securities and Exchange Commission. For many, this provides a level of emotional comfort.

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Here are a few highlights of this past week's earnings coverage from BloggingStocks:

• Big Lots Inc. (NYSE: BIG) reported a record quarter due in part to improved distribution.
• Blyth Inc. (NYSE: BTH) trounced EPS estimates and raised its guidance.
• ConAgra Foods Inc. (NYSE: CAG) raised its earnings forecast for Q2 on strength in merchandising.
• Donaldson Co. (NYSE: DCI) beat estimates due to strength in international markets.
• J. Crew Group (NYSE: JCG) posted a solid quarter due to strength in both store and direct sales.
• Krispy Kreme Doughnuts Inc. (NYSE: KKD) narrowed its loss, but foresees further store closures.
• Liquidity Services Inc. (NASDAQ: LQDT) posted a strong quarter, benefiting from the sluggish economy.
• Merck & Co. Inc.'s (NYSE: MRK) earnings forecasts for 2007 and 2008 fall short of expectations.
• Netezza Corp. (NYSE: NZ) beat expectations of both earnings and revenue.
• Palm Inc. (NASDAQ: PALM) forecast a loss for the current quarter due to product delays.
• Royal Bank of Scotland's (NYSE: RBS) better-than-expected forecast buoyed European banks.
• SeaChange International (NASDAQ: SEAC) reported a profit when analysts expected a loss.
• Sigma Designs (NASDAQ: SIGM) had a "blowout" quarter, beating even the most optimistic analyst.
• SkillSoft (NASDAQ: SKIL) beat expectations of both earnings and revenue.
• Toll Brothers Inc. (NYSE: TOL) posted a lower-than-expected loss, its first quarterly loss in 21 years.

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Source : www.bloggingstocks.com
Procter & Gamble (NYSE: PG): Safe, safe, safe. The high in these shares at $74.60 was hit at the end of the week. The 52-week low was just above $60. But, if consumer spending stays even marginally good, P&G is considered rock solid, especially with financial, tech, and automotive all showing signs of dips into the end of the year. The company also has a yield of almost 2%, operating income of over $2 billion a quarter, and $4.6 billion of cash on its balance sheet.

Pepsico (NYSE: PEP): Another big anchor for any storm hit a 52-week high of $77.18, up from a low for the period of $61.46. It's another bet on low-priced consumer spending being OK in the U.S. and global product diversification. People buy Pepsi everywhere. PEP is another 2% yield stock with operating income running over $2 billion a quarter. It's hard to see this one getting knocked down unless the market looks like the 1930s.

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Here are a few highlights of this past week's earnings coverage from BloggingStocks.com

• Campbell Soup Co. (NYSE: CPB) first quarter profits fell, but the CEO remains optimistic.
• Dell Inc. (NASDAQ: DELL) met EPS expectations, but shares fell in after-hours trading anyway.
• Marvell Technology Group Ltd. (NASDAQ: MRVL) beat EPS estimates despite posting a loss.
• Medtronic Inc. (NYSE: MDT) had a weak second quarter, but CEO remains optimistic about growth potential.
• Sears Holdings Corp.'s (NASDAQ: SHLD) profit plunged, and the company warned of continuing difficulties.
• Staples Inc. (NASDAQ: SPLS) beat low expectations, sending shares up.
• Tiffany and Co. (NYSE: TIF) posted a solid third quarter and boosted its full-year earnings outlook.
• Warner Music Group's (NYSE: WMG) profit declined; digital sales were up but CD sales were down.

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Source : http://www.investorsadv.com

While I believe that index investing has its merits, I do not believe that it is the only means of getting your investment compass to point true north. Advisors who buy into MPT fail to acknowledge the many issues with indexing – so allow me to provide some counterpoints to their argument.

Let’s start with the philosophical. To say the markets are efficient is to assume that man is infallible. Anyone making that assumption needs to check out the nightly news. The fact is that the markets are made up of a bunch of people (investors) who consistently make irrational decisions based on emotions such as pride, greed, fear, envy, ect. If you are able to eliminate those emotions from investment decisions, it’s very possible to beat the market on a consistent basis. To paraphrase Michael Lewis in his bestseller Moneyball, “Irrationality creates enormous opportunities for those who have the ability to resist it.”

Let’s continue with the philosophical…The market is a zero sum game, where the average participant performs right at the index prior to expenses. Once you factor in expenses, the average market participant does lose to the market by a slight margin (1-2%). To say that over half the market’s participants don’t beat the index is about as insightful as saying the average NFL record this year was 8-8. (And I’m willing to bet you that next year it will be 8-8 as well.) MPTer’s make the argument than no man or woman can consistently beat the market which is asinine because many have. The performance records of investing legends such as Jim Rogers, George Soros, Warren Buffett and John Templeton prove that beating the market on a consistent basis is attainable.

Now, let’s proceed to more practical issues with Index Investing, First, it provides no protection against losses in a bear market. When the market loses, you lose.

MPTer’s often ignore secular trends and investor time frames. (MPTer’s can’t go 5 minutes with out blubbering something about “Over long periods of time, the market does this or that…unfortunately, as my 87 year-old grandmother points out, we don’t all have that much time.) The problem lies in the fact that the market has historically gone very long periods of time and not done squat. For example, it took the market 25 years to recover from the ’29 crash. It wasn’t until 1980, that the S&P bested its 1966 peak (14 years if you’re counting). Japan’s NIKKIE index is still 60% below its 1989 peak. If you’re caught in one of those periods known as a secular bear market, don’t count on any income or appreciation from your equity portfolio for a long time.

There are a lot of bright analysts and economists who make convincing arguments that our equity markets are currently embedded in a long-term secular bear market. Ed Easterling of Crestmont research is one of these such analysts. He says in his paper titled “Markowitz Misunderstood: Modern Portfolio Theory Should Come With a Warning Label”:

Almost unanimously throughout the past century, when the P/E is above average (average is 14.5), subsequent returns are below average. As well, below average P/E’s drive above average returns…So since the current P/E is well above average, shouldn’t the assumption for Markowitz’s model be below average returns?

If you have a 100 year time-frame, index investing is great way to go, but if you have a 20-30 year timeframe, index investing is as much subject to secular trends as any other equity focused strategy.

Index investing discounts volatility. Realized returns have historically been around 2% less than average returns.

Index investing deemphasizes the importance of inflation: Stocks and bonds do poorly in an inflationary environment. So, if you’re 100% invested in equities and bonds during an inflationary period, the negative impact of sub-par returns in equities will be compounded by a loss in purchasing power. (I think it is interesting that index investing is gaining so much popularity just as inflationary pressures are picking up.)

THE BIGGEST FLAW OF THEM ALL: Chasing Returns!!! I find it ironic that one of the most prolific arguments made index fund advisors is that “chasing returns” is a loser’s game. Ironically, Index investors are most egregious offenders when it comes to “chasing returns” – they are just far slower to react to trends.

Not a single index investor that I know of recommended real estate in the late 90’s, but now they all include real estate in their portfolios. The biggest proponent of index investing in my hometown of Dallas, TX is a fellow by the name of Scott Burn’s. In the late 90’s, Burns, the creator of the infamous “Couch Potato Portfolio”, couldn’t even spell Real Estate but a few years ago he created the The Four & Five-Fold Portfolios which conveniently include a 20% allocation to REITs. (I’m actually a big fan of Mr. Burns. His work to uncover the insidious evils of variable annuities and all things insurance is priceless.)

Few, if any, MPTer’s currently suggest building a commodity allocation in your portfolio - the only asset class that truly provides negative correlation to equities and bonds. But they will all include a commodity allocation in the next 5 years after the biggest gains of the current commodity secular bull market have already been missed. (A few started recommending commodities prior to the pullback in the space last summer. The pullback was just strong enough to scare these advisors away causing their clients to lose out on the second stage of the secular commodity bull market.)

There is a very basic, fundamental flaw with index investing which is that they use backwards tested data in making forward looking projections. They calculate what would have worked best and assume that that strategy will continue to work best. Unfortunately, the markets work in the exact opposite manner resulting in MPTer’s “buying high” and “selling low”. Furthermore, it results in them adding sectors or asset classes long after the “easy” money has been made. (Ironically, Markowitz’s paper ever-so-briefly addresses this issue but it is largely ignored by MPTer’s who see their strategy as flawless.)

MPTer’s don’t include Commodities because the sector was such a lousy performer over the last two full decades. If they included a commodity allocation, their “projected returns” based on the extrapolation of historical returns would be far less appealing. However, in 2000, the best thing you could have done was move your portfolio to commodities. (Did you know, that the Dow Jones Index is actually down when priced in Gold since it started its rally in Oct of ’02.)

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For starters, let’s set a growth rate for WAG.

It should pretty much jump out at us once we know what are we looking for.

Let’s start with the historical equity growth rate. Strangely, the first place I go is the Cash Flow Statement to see if the business has been paying a lot of uneven dividends. By that I mean to check whether they paid out a big lump sum of equity to investors. If so, that needs to be added back in.

WAG pays dividends, but very evenly -- so there is no need to mess with that.

I also check to see if they’ve been buying back stock, another thing that affects the equity line if you aren’t doing this per share.

WAG has been buying stock, but they now have basically the same number of shares they had ten years ago -- so no big deal.

So now we can go to the Balance Sheet and go to work. Actually, now we know we can use the pre-calculated equity growth rates on MSN or Investools or Yahoo which tell me that WAG equity has been growing consistently at roughly 15% for years slightly down from 17%.

That number now becomes my defacto Rule #1 growth rate. Now I’m going to see if the other growth rates will make me want to lower or raise that number.

EPS growth is sliding slightly from 16% long term and is probably about 14-15%.

Sales growth is sliding slightly down from 15% and is now 13-14%.

These numbers make me want to nudge the growth rate down to 14% as Doug and Frank did.

Free Cash is usually a mess for retailers and therefore not much help, so I go to Operating Cash to get a better picture. The long term Cash growth is 16% for 10, 28% for 5 and 18% for 3.

This number makes me want to nudge the growth rate up to 16%.

If ROIC is staying strong (and it is at about 11%) then I feel pretty good about management keeping their eye on the business.

These, taken together, make me feel pretty good about a number that is 15%-ish. So now let’s see what the pros think.

I’m now looking at projections on Investools. It's on MSN, too. 12 pro analysts estimate the growth for WAG to range from 14% at the low end to 17% at the high end, averaging 15.5%.

First thing this tells me is that this company is quite predictable. That is a very small range for that many analysts. That’s good news.

The second thing is that my comfort level with 15% is in good company. I’m right in the middle of the bell curve.

And the third thing is that if I was sitting on the fence to move the projection up a bit, I wouldn’t be out of line to do so.

And lastly, that using 14% is a very conservative number. Maybe too much so.

All that said, I’m pretty happy with my 15%, so I’m going to stick with that. And now that I have my growth rate, I also automatically have my Rule #1 PE Ratio: 30. We just double the growth rate.

And now I want to see what the historical PE ratio range is. On MSN I look at financials, key ratios, price ratios.

On Investools I click on Phase 2 Financials.

Investools tells me that WAG has a PE in the mid 30’s every year as a high and the low is mid 20’s. I could fairly put the average PE near 35 and not be wrong. I could also be really conservative and put it in the mid 20’s. Doug and Frank did that, too. Nothing wrong with that, but it is very conservative. Investools is telling me that the average PE is 28-29. But with the PE consistently higher than that sometime during all the years, I’m totally good with it at 30, so that’s my PE.

Remember, we’re trying to put a real value on this business, not lowball the thing. We want to know what a reasonable buyer would pay without all the ulterior motives that private equity has or public companies have to pay too much -- and we want to be fair to the business. We’re not trying to steal it. Yet. We'll get to that part soon enough.

Now grab the current trailing twelve months EPS. It's $2.04, as everyone pointed out.

And here it makes sense to look briefly at the quarter by quarter EPS over the last couple of years to make sure we’re not trying to price this business just as it had a monster out of the ordinary quarter one way or the other.

Just make sure the last twelve months are representative of what you should expect long term. A quick check on Investools’ Quarterly Earnings (under Fundamental Analysis) and we can see a graph that tells us visually that this last twelve months is much like the previous twelve.

And then we do the math. Using the Rule of 72, $2.04 growing at 15% doubles twice in ten years to $8.16 ($8.25 using Excel). Multiply by 30 and we get $244 or so. Divide by 4 and we get $61.

Let’s call my valuation of WAG today $61 a share.

Since I’m experienced at this one, now I know I can buy WAG when it is priced below 80% of $61. So my MOS for WAG is anything below $49.

If you are new at this or not too sure you’ve got a solid valuation, go for a bigger MOS of 50%. In this case that means you are hoping to buy WAG for about $31.

Obviously the problem with trying to buy something this predictable with that big of a discount is that you might be waiting for a big scary meltdown of the whole market before you can pick it up. Well, that’s not so bad. That’s what Buffett does. And is doing. He’s sitting on about $45 billion in cash right now waiting for exactly that, so if you sit with him, you are in good company.

On the other hand, we are so much more nimble than Buffett, as he readily admits. So if WAG starts to melt down, I’m going to get out. That fact makes me feel pretty solid about investing in it when it's below $49.

And what’s the price right now? $44.

So if I buy it at $44 and just hold it (forget what I just said about getting out), I should be able to sell it in 2017 sometime for about $245. And if I can do that, I will have compounded my money at 19% per year. And if I get out at the high end of the PE range my return might be as much as 21% compounded for ten years.

Now go play.

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Jim Huguet looks for undervalued stocks in companies with double-digit earnings growth potential, but takes his time buying them.

Source : http://www.businessweek.com

Earnings growth and valuation are key to finding good stocks, but other factors make a company "great," according to Jim Huguet, president and co-CEO of Great Companies in Tampa. The money manager holds 25 stocks in his large-cap portfolio because it's hard to find ones that pass all of his tests. "Not all great companies are great investments," he says. Huguet starts by studying a company's five-year earnings record and evaluates whether the stock is trading at a discount to its projected five-year earnings growth. Then he determines whether the company is led by a terrific CEO, operates in outstanding businesses, has strong protective barriers such as patents and brand franchises, is innovation-driven, has global reach, is people-oriented, and embraces sound corporate governance.

"If you look at great companies that have solid earnings growth over a long period, it's almost like there's a DNA in the makeup of the company—it's part of the culture and what they do," he says.

His strategy has reaped impressive returns in both bear and bull markets for his clients. During the bear market from 2000 to 2002, his large-cap portfolio rose 1.8% (cumulative), while the Russell 1000 tumbled 55% and the S&P 500 lost 37%. In the bull market from 2003 to 2005, the portfolio rose 57% (cumulative), vs. 45% and 49%, respectively. Since the portfolio's inception in 1993, his annualized return is 13.4% (after expenses 12.7%), vs. 10.3% for the S&P 500 and 8.29% for the Russell 1000. Huguet says he's planning to launch a fund within the next three months or so.

Karyn McCormack of BusinessWeek.com met with Huguet in New York recently to talk about his favorite stocks. Edited excerpts follow.

What's your investing philosophy?

We believe that if you look at companies with great earnings, that are trading at a discount, and have all the qualities of a great company, you will end up getting great returns. What we look for are companies that historically have had solid earnings growth, will continue to grow their earnings going forward, and are trading at a discount. Earnings determine the market price.

For example, Coach (COH) has historically grown earnings at 46.2% since 2000, and the return has been 52.5% for investors annually. Weatherford (WFT), an oil services company, has had 29% growth in earnings and a 25.9% return. Stryker (SYK) had 24% earnings growth and 25% return. Over the longer term, you'll see for companies that are increasing earnings, their market prices will increase at approximately the same rate.

Goldman Sachs (GS) is trading at a discount to its true value. Historically, Goldman has increased earnings at about 13% a year. Going forward, the estimate from 19 analysts that follow Goldman is it will increase earnings over the next five years at 15% a year.

So here's a company trading at a discount that is going to slightly increase earnings growth—if it were to do that you would look at an annualized return over the next five years of about 19.5%. That's the kind of company we want to invest in.

What are the other criteria you look for?

The traits we look for include: a terrific CEO, is it a great business, does it have strong protective barriers, is it a global company?

What are some of your favorite holdings?

We think Weatherford is a very well-run company.

We like Coach. If you look at the earnings line, just like Goldman Sachs, this company has historically increased earnings at 46% a year, from 2000 to 2006. That's going to slow down, we think, to 20% a year. But given where the stock price is, we think you're looking at returns over the next five years of around 15%.

What's the most important thing you look for?

In our premises for investing, No. 1 is earnings determine market price. No. 2 is we want to have companies showing double-digit earnings over time. That's really our definition of a great company—that over time, it's growing at double-digit rates, 14% to 15%.

No. 3 is it's trading at a discount to its value. Then you're going to make money on that investment, somewhere in the 15% to 20% range, because there's a direct correlation between earnings growth and returns.

But by the same token, great companies don't stay great forever. Managements change and businesses change, and you could have a situation where a company becomes overvalued and you want to sell and get out of the stock.

Procter & Gamble (PG) is a terrific company—with great brand franchises, wide moats, innovation, outstanding management, global—they're everything. But the stock is trading above its earnings growth rate.

Furthermore, earnings growth is expected to slow from 17% to about 11% going forward. Because it's overpriced and earnings are slowing down, your return on Procter over the next five years is probably going to average around 3%—not a particularly attractive return. It's a great company, but not necessarily a great investment.

Take UnitedHealth (UNH)—another one that I think is a great company. The stock price is trading at a discount—it got hit as a result of the backdating of options and the CEO making a lot of money. If you look at their earnings growth rate going forward at 17%, now you're looking at a return over the next five years of 14% to 15%.

They're both great companies, but one is a great investment and the other isn't.

What are some of your newest positions?

Goldman Sachs and Weatherford are new. They were bought within the last three months. Coach we added fairly recently also.

How many stocks do you own?

We have 25 stocks in the large-cap portfolio. The challenge that you find, quite frankly, is the difficulty in finding companies that have really solid earnings growth and are trading at a discount.

For companies like Procter—a predictable, solid company—people pay a premium for that kind of certainty, vs. companies that are volatile in terms of pricing and what their earnings might be. So it's hard to find really great companies that are trading at a discount. But they're out there if you look hard enough.

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by Walter Updegrave
Wednesday, October 17, 2007provided by

A Roth seems like the obvious choice over a traditional IRA since it has tax-free withdrawals. Not always, says Walter Updegrave.

Question: If you contribute to a traditional IRA, after many years most of your account value will be in the form of investment earnings, which are taxable when you withdraw them. With a Roth, on the other hand, your balance will be tax-free. So it seems to me that the advantage of tax-free withdrawals from the Roth in the future greatly outweighs any tax-deduction benefit you get from a traditional IRA. Doesn't that make the Roth a better deal? - Daniel Siroky

Answer: A lot of people aren't quite sure how to assess the value of contributing to a traditional IRA vs. doing a Roth. That's not surprising, given the number of factors that can affect which is the better choice for a given person in a given circumstance.

Generally, I think having at least some money in a Roth IRA (or Roth 401(k), if that option is available to you) is good idea for several reasons. But before I get to them, I'd like to step back and explain how both traditional and Roth IRAs work in a way that, I hope, will give you and others a better understanding of them and help you decide which type to fund.

I'll start by stating a premise that many people overlook or simply don't understand about traditional and Roth IRAs - namely, that theoretically at least, they're equal in terms of the tax advantages they offer. This isn't immediately apparent. And I've talked to many people, including advisers, who don't seem to get this. But I think a little example will show you what I mean.

Let's say you've got $4,000 that you can put into either a traditional or Roth IRA. (The maximum IRA contribution for this year is $4,000, plus $1,000 if you're 50 or older; next year, the max goes to $5,000, plus $1,000). And let's assume that you'll earn 8 percent a year on your contribution for 20 years.

If you invest your four grand in the Roth, you'll have $18,644 in your account after 20 years. And, assuming you meet the withdrawal criteria, every cent of that money will be tax-free. If you put the $4,000 in a traditional IRA, you'll also have $18,644 after 20 years. But you'll owe tax on withdrawals. So if you're in the 25 percent tax bracket, your balance is worth only $13,983 after taxes, much less than the Roth.

But hold on. You also get a tax deduction with the traditional IRA. So to make the comparison even, you've got to factor in the value of that deduction. If you're in the 25 percent tax bracket, a $4,000 deduction saves you $1,000. If you invest that $1,000 and earn 8 percent for 20 years, you end up with $4,661. Add that to the traditional IRA's after-tax balance of $13,983, and you end up with $18,644 - exactly what you've got in the Roth.

Remember, though, I said the traditional IRA and Roth IRA are theoretically equal. In the real world, even if you were disciplined enough to invest your $1,000 savings from the traditional IRA's tax deduction, you would have to invest that money in a taxable account since you had already reached the annual IRA contribution limit.

So you won't get an 8 percent return a year after taxes. You'll get something less than that. Which means your $1,000 will grow into something less than $4,661. Which means that even after factoring in the value of your traditional IRA's deduction, the Roth IRA still comes out ahead.

So all things being equal, the Roth has an advantage. It effectively allows you to shelter more money from taxes. Congress could have adjusted for this by setting a lower contribution ceiling for Roths, essentially lowering the Roth limit as you move into higher tax brackets. But it didn't.

Ah, but let's not be so quick to assume that just because the Roth has this advantage that it's automatically the better deal. In fact, reality can intrude again in a way that can whittle down or even eliminate the Roth's advantage. How? Well, it comes down to tax rates.

When I compared a Roth to a traditional IRA in the example above, I assumed that you were in the same tax bracket, 25 percent, when you withdrew your money as you were when you contributed to it. But what if everything in the scenarios I described above remained the same, except that you dropped to, say, the 15 percent bracket in retirement when you were ready to dip into your IRA accounts?

Well, in that case, you would have $15,847 ($18,644 minus 15 percent, or $2,797 for taxes) after-tax in your traditional IRA, which is more than the $13,983 you had with a 25 percent tax rate. That would leave you just $2,797 short of the Roth.

That means as long you earned roughly 5.3 percent or more annually after-tax on your $1,000 tax-deduction savings - or, in other words, as long as you gave up less than a third of your annual return to taxes, which I think is doable if you invest in something reasonably tax-efficient like an index fund or tax-managed mutual fund - then you would come out ahead in the traditional IRA rather than the Roth.

In short, the tax rates you face prior to and at the time you withdraw your money can also determine whether a traditional IRA or Roth is a better deal.

Generally, if you expect to be in a lower tax bracket at retirement than you were when you made the contribution, then the traditional IRA is the better deal since you're effectively avoiding tax on your contribution and earnings when the tax rate is higher and paying it later when the rate is lower.

If you expect to be in a higher bracket when you withdraw the money, then Roth is the better choice because you're paying tax at a lower rate and avoiding tax when the rate would be higher.

And if you expect to stay in the same bracket, the Roth is the better choice because of its inherent advantage of effectively sheltering more money. As a practical matter, however, we can't always know whether we'll be in a higher, lower or the same tax bracket in the future.

Most people probably expect that their taxable income will fall in retirement, dropping them to a lower tax rate. But if you save like a demon and have tons of money in tax-deferred accounts like a 401(k), the withdrawals could push you into a higher bracket, at least in some years. And, of course, there's always the possibility that Congress could raise rates in the years ahead.

Which brings me back to my position that I think it's a good idea for most people to have at least some money in a Roth. Most people are likely to have the bulk of their retirement savings in a regular 401(k), which means withdrawals will be taxable (except, of course, any nondeductible contributions, if you made them). So a Roth provides a way of diversifying your tax exposure and gives you more flexibility for managing withdrawals (and your tax bill) in retirement.

If it appears you're about to move into a higher bracket in a given year in retirement, for example, you can pull tax-free money from your Roth. But there are also other reasons to do a Roth. Whether you want to or not, you've got to begin making required minimum draws from traditional IRAs after reaching age 70 1/2.

With a Roth, however, you can leave your money in there to compound tax free as long as you want - and even give the gift of tax-free returns to your heirs. And unlike withdrawals from IRAs and 401(k)s, the money you pull from a Roth isn't counted in determining whether any of your Social Security payments are taxed. So having access to a Roth could help keep the IRS's mitts off your Social Security benefits. (To see whether your Social Security benefits are likely to be taxed, click here.)

To sum up, it's tough to say whether a traditional IRA or Roth is always a better deal for a given person. But for the reasons I've laid out in this column, I believe it's a good idea for everyone to consider putting at least some money in a Roth, whether you do so through regular annual contributions, converting a regular IRA to a Roth or, if those routes are out, doing a nondeductible IRA that you later convert.

Even if it turns out in retrospect that the Roth wasn't the best deal, having access to a pot of tax-free cash can still give you peace of mind and a bit of maneuvering room in retirement.

Copyrighted, CNNMoney. All Rights Reserved.

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