Monday, October 25, 2010

Money Losing Government Bonds?

The New York Times reported today that investors are willing to accept a negative interest rate for the privilege of investing in a particular type of bond.  The bonds in question are known as Treasury Inflation-Protected Securities, or TIPS.  You can learn more about them here, but basically they are a type of loan to the U.S. Government.  What makes them unique is that your interest rate is tied to the inflation rate.  The more inflation rises, the more interest you earn.  Of course, if inflation rises, the cost of goods increases, so you are just breaking even.  However, it does provide an investor with a way to protect his or her money if inflation spikes.

The unique thing about the more recent sale of these bonds is that investors were willing to accept a negative interest rate in return for this inflation protection.  The article says that investors are willing to pay the government 0.55% in interest for this protection.  In other words, if inflation stays constant, then investors actually have to pay a little over half a cent for every dollar invested.   If inflation rises, then investors will get an interest rate equal to inflation, minus the 0.55%.  On the surface this seems like a bad deal.  After all, you can put your money into any savings account and not lose money (unless you trigger fees and penalties, but that is another story).

So why would an intelligent investor engage in such an investment?  One quirk of TIPS is that if there is deflation (i.e. where prices are falling), the U.S. Government doesn't lower the interest rate below -0.55%.  That is the worst that you can do.  However, if inflation goes up, then you end up making money.  Investors who feel like inflation is going to rise sharply will do what it takes to protect themselves, and TIPS are one way to insure oneself against rising prices.  If you put $100 into TIPS and inflation rises 10%, you get back $109.45 which will just about make up for the fact that $100 of products will now cost you $110.  Yes, there are other investments which will rise with inflation, but with TIPS the connection is built into how the investment is designed.

Who knows?  Maybe these crazy investors aren't so crazy after all!

Thursday, October 21, 2010

Life Insurance Primer. Part Two: Term Insurance

In the first post in this series, I introduced the most common flavors of life insurance.  Now I will do a deeper dive into the simplest one:  term life insurance.  As I stated in Part One, this is the form of insurance that 99.9% of people should consider.

Before I start, I want to just say a few more words about life insurance in general.  Life insurance is a very morbid thing to think about. I mean, who wants to think about dying? It is a subject that few people want to consider. However, you've got to man-up (or woman-up as the case may be).  When you are an adult with people who depends on you, part of your responsibility to them is to make sure that they are taken care of.  There are too many stories of a mother or a father dying unexpectedly, leaving their widow/widower and kids without the means to take care of themselves.  So I say, suck it up, look the Grim Reaper square in the eye, and deal with it!

Term insurance is straightforward; you pay a premium to an insurance company and, in return, the insurance company pays your heirs the policy's face amount if you die.  If you don't die, you and your heirs get nothing.  In this respect, term insurance is a lot like car insurance or homeowners insurance.  You pay a premium but if you don't have any claims, you get nothing.  Term insurance gets its name from the fact that the insurance lasts for a limited period of time, which is coincidentally called the term.  Normally, you have the ability to renew the policy when the term is up, although the insurance company can raise your premium depending upon the terms (no pun intended) of the policy.

Setting the Premium:

Your premium is tied to how likely it is that you will die during the term of the policy.  The insurance company employs actuaries to determine how much they should charge each person, based upon their risk.  If you have a higher risk of dying, you will pay a higher premium, just like you would pay more for car insurance if you got lots of speeding tickets.  Common factors that insurance companies consider are age, gender, health, and geographic location.

Usually, insurance companies will quote you their "best" rate, which is the rate that they would give to somebody in perfect health.  However, it is possible that you won't be able to get this rate.  When you apply for your policy, insurance companies will go through a process called underwriting.  This involves asking the applicant lots of personal questions, requesting medical records, taking blood samples, and so forth.  The more insurance you want, the more involved the process will be.

Once this is done, the insurance company will come back with an assessment of your overall risk.  Normally, they will classify applicants into a variety of categories like "preferred", "standard", or "rated".  The exact classifications vary by company.  The important thing to note is that each classification has a different premium.  Once you have been quoted your exact premium, all that is left to do is sign the contract, and you are good to go.

Varieties of Term Insurance:

The simplest type of term insurance is one-year renewable term.  With this type of insurance, you have the option of renewing the policy every year without going through the underwriting process.  However, your premium increases from year to year, reflecting the fact that as you get older, your risk of dying increases.  Eventually, the premium might get so high that you might cancel the policy.

A second form of term insurance is level term insurance.  This type of insurance is similar to one-year renewable term, except your premium is guaranteed to stay the same for some fixed number of years.  The catch is that the longer the guarantee period, the higher your premium will be.  Once the guarantee period is over, the insurance company is free to raise your rates.  Many people will drop their insurance once the guarantee period is over rather than paying the higher premium.  This type of insurance might make sense for those who want certainty in their premiums and only anticipate needing insurance for a limited period of time.

You Should Consider Term Life Insurance If:

- If you have a family that depends upon your salary to pay the bills.

- If you have a family that depends upon your time and effort as a stay-at-home parent.  This is one situation that many people don't consider.  Even if you aren't the breadwinner, if something happened to you, your surviving spouse will now be faced with the added expense of childcare, or maybe he or she will have to work fewer hours (and make less money).

- If you want to make sure your kids have money for college if you die.

- If you want to make sure your mortgage is paid off so your family doesn't have to move if something happens to you.

Because the premiums rise with age, term insurance makes sense if you need protection for some limited period of time.  Generally, as you get older, your kids are on their own, your mortgage is paid off, and you have hopefully put aside savings for retirement.  Therefore your need for life insurance goes away, which is why term insurance makes sense for the majority of people.

When Shopping For Term Insurance:

- Consider the health of the insurance company.  You want to make sure that the company will be around for the next 10, 20, 30 years so that way if something happens to you, the company will able to make good on the policy.  There are several independent agencies that rate insurance companies for financial health, so only consider companies that is well regarded.

- Consider the premiums.  If you know the insurance company is financially sound, there really isn't any difference between company A and company B.  There really isn't much else to differentiate one company from another other than price.  However, most companies will quote their best price.  Just because company A has the lower preferred policy doesn't mean that all of its policies are cheaper.  Ask for a rate comparison for different risk levels.

- Buy enough insurance.  Determining the amount of insurance that you need is a tricky problem.  Perhaps I will dedicate a future article to it, but for now, the best advice that I can give is to do your homework and buy what you need.

Tuesday, October 19, 2010

Life Insurance Primer. Part One: Introduction

Life insurance is something that many people need, but not everybody truly understands.  It seems deceptively simple on the surface:  you pay small amounts of money to an insurance company in return for the promise to pay your heirs a bigger amount of money when you die.  However, there are so many options and variations that it can quickly become confusion to even the most financially savvy person.  Because of its surprising complexity, I have decided to dedicate a series of posts to explaining the different forms of life insurance.  This may be an impossible task at which even the mighty MBTN might not be able to succeed.  In case I should fail, I want to start with the number one rule of life insurance.  If you don't understand anything else, please remember this:

Most people should buy term life insurance and forget the rest.

With that out of the way, let me introduce to you the various forms of life insurance.

1. Term Insurance:

Term insurance is, by far, the simplest form of life insurance.  You pay a premium to a life insurance company and, in return, they pay your heirs the policy amount when you die.  As long as you pay your premiums, your heirs will get the money.  If you stop paying, your heirs get nothing.  No fuss, no muss.

2. Whole Life Insurance:

Here is where things start to get complicated.  With whole life insurance, some of your premium goes into an account known as cash value.  The cash value earns interest like a savings account.  If you die, your heirs get the policy amount.  However, if you decide to stop paying your premiums, the insurance company gives you back any money that has accumulated in the policy's cash value.

3. Universal Life Insurance:

This adds another twist to whole life insurance.  With universal life, you can choose to deposit additional money into the policy's cash value above and beyond your normal premiums.  Thus, if you have extra money you want to save, you can choose to "invest" it with the insurance company.

4. Variable Universal Life Insurance:

Not to be outdone, insurance companies have added yet another variation into the mix.  With variable universal life, you can choose how your cash value is invested.  Rather than just earning interest at a rate set by the insurance company, you can decide to invest your money in stocks, bonds, or other investment options.  In essence, your insurance policy becomes like a brokerage account! 

As you can start to see, life insurance can be quite complicated with all of these different options and variations.  In my next installment, I will go into more details about term life insurance, how it works, and what some of the common options are for it.  Stay tuned!

Sunday, October 17, 2010

CD's Aren't As Risk Free As You Think

The humble bank Certificate of Deposit (CD) is making a comeback.  For most of the 1990's and 2000's CD's were the minivan of the investing world:  safe, secure, but oh so lame.  If you really wanted to be an investment fashionista, you'd bought dot com stocks, real estate, exotic options, and ETF's.  A CD investor was a boring clod who either was too dense or too fearful to put their money in "big boy" investments.

But then all of the big boy investments tanked, and now CD's are cool again.

People are flocking to CD's in large numbers, thinking that they are a safe haven from the wolves of Wall Street.  Despite the low interest rates that most CD's pay, the protection that they offer more than makes up for the paltry returns for most people.  However, I am here to throw some cold water on the CD party.  They are not as risk-free as they seem. 

CD's are relatively simple investment products.  You give some amount of money to a bank for a period of time, and the bank returns your money with some amount of interest thrown in.  If you decide you want your money back before the time of the CD expires, you pay a penalty, which usually amounts to losing some or all of the interest that you would have earned had you left the money alone.  One last key characteristic is that the interest rate is fixed for the length of the CD.

[Note:  There are some CD's which offer the ability to reset the interest rate, but usually these CD's pay a lower rate of interest and this option is usually a one-time deal].

So what makes a CD risky?  After all, you can't lose your money, right?  Yes, that is true, but what makes a CD truly risky is that fact that your interest rate is locked in.  What happens if interest rates rise while your money is locked up in a CD?  If that happens, you will be missing out on the higher interest rates because your money is locked up at a lower rate.

Why does this matter?  After all, you are still making some amount of interest, and you aren't going to lose your intial stash.  The problem is that usually when interest rates rise, inflation rises too.  That means that the money that you put into the CD is going to lose purchasing power.  When the CD comes due, the money that you get out at the end will buy less than it did when it started.

Here is an example of what I am talking about.  According to, the average 5 year CD pays an annual interest rate of 1.63%.  That means if you deposited $10,000 into the average 5 year CD, you'd end up with $10,842 when the CD matures.  Not too shabby, right?  However, let's say that during that 5 year period, the average annual inflation rate jumps to 5%.  That means that your $10,842 in five years will be equivalent to $8,595 today.  That is because the prices of everything will have jumped 5% per year.  You've just lost 14% by investing in a CD!

This is a just a hypothetical example.  There is no guarantee that inflation is going to go up and everything will cost more in five years.  However, it illustrates that CD's aren't as riskless as you think.  What can you do to protect yourself from this situation?  Here are some possibilities:

1. Put your money into short term CD's.  If you invest in a 1 year CD, you have an opportunity to reinvest your money after a year at a higher rate if inflation is higher.  Generally, when inflation goes up, CD rates go up as well.

2. Buy CD's of varying maturities.  The flip side of example I gave above is the situation where interest rates are falling.  If interest rates drop, you would have been better off locking in a higher rate for 5 years.  Of course, nobody knows what interest rates will do from year to year.  Therefore, to hedge your bets, so to speak, you can put your money in CD's of varying lengths.  If interest rates rise, you can take the money from your shorter duration CD's and reinvest them at the higher rate.  If interest rates fall, the money in the longer duration CD's will continue to earn a higher rate.  This is just another form of diversification.

The bottom line is that when you invest in a CD, you are locking yourself into a fixed interest rate.  This can be good or bad depending upon what direction interest rates move.  This risk is something to consider before you invest in a supposedly risk free CD.

Friday, October 15, 2010

Baseball by the Numbers

I just finished reading a fascinated book entitled Moneyball by Michael Lewis.  Although the book is about baseball, it is an interesting read even for the non-sports fans.  There are a lot of lessons in there about money and investing if you are astute enough to pick up on them.

The book describes how the Oakland Athletics were able to field a winning team in the early 2000's on a shoestring budget.  The main protagonist of the book is Billy Beane, who is the team's general manager.  As GM, it is Beane's job to choose the players and assemble the team.  Unlike other sports, baseball has no salary cap.  Teams are free to spend as much or as little money as they want to acquire players.  Rich teams like the Yankees can lavish rich contracts on superstars, which is why the Yankees always seem to be in the playoffs every year.  On the other hand, poor teams like the A's cannot afford to spend money on superstars, so they have to be smart in how they use their money.

Baseball is a sport that reveres numbers and statistics.  The game is full of them:  ERA, RBI, saves, home runs, batting average, and the list goes on.  Baseball fans quote these stats like they are quoting passages from the Bible.  Numbers are so sacred in baseball that fans get into a lather about whether or not a home run total should have an asterisk after it or not.  However, baseball's dirty little secret is nobody truly puts these statistics to use to actually win games.  At least not until Billy Beane came along.

Since the 1970's there have been a small cadre of baseball fans, lead by a man named Bill James, who have tried to use statistics to truly understand the game.  They wanted to use numbers and logic to determine such things as what to do in certain game situations, what to look for when drafting a rookie, and most importantly what statistics were best correlated to winning.  The result of this analysis produced some astounding results that went against traditional baseball logic.

The most important statistic - the one that predicted baseball success - was a high On Base Percentage.  This is the percentage of time a batter got on base either by getting a hit or by getting a base on balls.  Teams with a high OBP scored lots of runs, and teams that scored lots of runs won lots of games.  Therefore, when you are putting together a team, you should find players with a high OBP.  Compared to batting average, RBI, and home runs, OBP was a very minor stat.  Baseball scouts rarely paid attention to it.  They preferred players with gaudy power numbers who could hit the ball a country mile.  Chicks dig the long ball, not the base on balls.

Bill James and his group came to this conclusion based upon facts and logic, so it stands to reason that baseball insiders would take notice.  However, those inside baseball ignored it.  The collective wisdom of the baseball insiders was superior to a bunch of baseball geeks with their facts and figures.  The first baseball insider who took a closer look at this research was Billy Beane.

As the general manager of a small market team, Beane had to be smart about how he deployed his limited resources.  He had to maximize his resources in order to have a chance of competing.  He discovered that other teams overvalued things like home runs and other power numbers, but they undervalued on base percentage, which happens to be the best predictor of winning.  Therefore he concluded that he could stock his team with guys who could get on base for very little money and win.  At first, he was laughed at because he would sign players that nobody else considered to be any good.  However, he knew that if they could get on base more than the next guy, they could win.

And they did.

The book itself is partially about baseball, but the main theme is how mature institutions like baseball have a conventional wisdom which may be conventional, but it isn't wise.  It is based upon tradition and tribal knowledge, rather than real facts.  When people come along to challenge the conventional wisdom, it is often ignored or ridiculed despite logic.

So what lessons can you apply to your own life:

1. Do your own homework.  Don't rely upon conventional wisdom.  Trust your own judgment if the numbers back you up.

2. Listen to facts.  Just because something has been done a certain way for a long time doesn't make it the right way.

3. Buying assets which are undervalued and under appreciated is a consistent way to make money (just ask Warren Buffet).

Monday, October 11, 2010

Higher Taxes = Fewer Tom Cruise Movies?

One of the big questions making the rounds on the cable news talk shows is the effect of the proposed tax law changes on the economy.  For those who are unfamiliar with the issue, when President George W. Bush passed his tax cuts during his first term, many of those cuts came with an expiration date of 12/31/2010.  Now that this date is almost upon us, Congress is debating whether or not to extend these cuts, adjust them, or let them expire.  President Obama's proposal is to extend the Bush tax cuts for everybody except the most wealthy individuals.  People making over $250,000 a year would see their highest tax rate rise from 35% to 39.6% (which is what they were under the Clinton Administration).

The core of the debate is whether or not raising the taxes on the richest Americans would hurt our fragile economy.  Harvard professor N. Gregory Mankiw recently wrote a piece for the New York Times in which he argues that higher taxes on the rich will give the rich an incentive to work less:

"Maybe you are looking forward to a particular actor’s next movie or a particular novelist’s next book. Perhaps you wish that your favorite singer would have a concert near where you live. Or, someday, you may need treatment from a highly trained surgeon, or your child may need braces from the local orthodontist. Like me, these individuals respond to incentives. (Indeed, some studies report that high-income taxpayers are particularly responsive to taxes.) As they face higher tax rates, their services will be in shorter supply."

It's a pretty bleak picture, isn't it?  Higher taxes on the rich will mean it will be harder to get an appointment with a doctor, less likely that you will see your favorite performer in concert, and worst of all, fewer Tom Cruise movies.  The horror!  Write your Congresspeople and tell them that the "poor" rich need lower taxes so that they can continue to make Hollywood blockbusters.

The only problem is that his argument makes no sense.

Professor Mankiw's argument is that rich people will be turn down opportunities to make money because the government is taking a larger share of their earnings.  However, he neglects a basic economic concept known as opportunity cost.

Let's create an example that goes one step further than the Professor Mankiw's.  Let's assume that the tax rate is going to rise from 50% to 60%.  Now let's assume that Dr. Surgeon makes $10,000 per surgery.  In this example, Dr. Surgeon's take home income will drop from $5,000 to $4,000 when the tax rate rises.  Will Dr. Surgeon decide to perform the surgery?  In order to determine this, we have to look at her next best option.  Her next best option is to not perform the surgery, stay home, and make $0.  Under these circumstances, performing the surgery would be her best financial choice.  In fact, performing the surgery would be her best financial choice regardless of what the tax rate is.

This illustrates the concept of opportunity cost.  Opportunity cost is what you give up by not taking your next best option.  In this example, Dr. Surgeon's next bet option is to make nothing, so the opportunity cost of performing the surgery is $0.  Now one could argue that at some point, Dr. Surgeon is going to limit the number of surgeries that she does because she wants more free time, less stress, or for some other non-monetary reason.  However, these quality of life decisions aren't affected by the tax rate, generally speaking.  Yes, maybe if the government got 99% of her fee, she might consider working less.  However, back in the real world, we are only talking about seeing tax rates rise from 35% to 39.6%; this isn't high enough to make much of a difference in Dr. Surgeon's decision making process.

The bottom line here is that Professor Mankiw's argument makes little logical sense given the circumstances.  There won't all of a sudden be a shortage of surgeons if the Bush tax cuts are reversed for high earners.  On the other hand, maybe fewer Tom Cruise movies wouldn't be such a bad thing after all.

Thursday, October 7, 2010

The Kids are Alright

As somebody who happens to have kids, I can tell you first hand that kids don't come cheap.  Kids require lots of "stuff".  Diapers, cribs, swimming lessons, and 529 college funds are just some of the things that consume your money when you have little ones.  So when I read this article in US News and World Report entitled To Retire Early, Don't Have Kids, my initial reaction was to agree with the article.  According to the article, it will cost you a million dollars to raise the U.S. average 2.3 kids.  That's money that could be put aside and used for a comfortable retirement.

However, I started to think about the premise and started wondering if there wasn't a paradox lurking in here.  In today's modern American society, it is normal for most families to have about two children.  It is rare when a family has more than four.  However, if you rewind 100 years, you will remember that families back then were often much, much larger.  It was common for a couple to have five, six, seven children or more.  All of my grandparents had large numbers of brothers and sisters, and my parents grew up with an army of first cousins.  The paradox is that all of my grandparents grew up in families that did not have a lot of money.  Most of their parents were immigrants from other lands, and they came here with literally nothing.  Despite this, they still had more kids than parents today who have an infinitely higher standard of living.  How is this possible?  Is it true that kids are inherently a drag on the family finances, or can they be an asset rather than a liability?

The first thing is that when you have nothing you don't miss what you don't have.  If you have to share a bed with your brothers and sisters, if all of your clothes are hand-me-downs, if eating out is a rare treat, if soccer practice consists of playing in the street with your friends, you don't expect or need a lot of things that cost money.  Raising kids in this environment is just cheaper.

The second thing is that kids were expected to "work" at a certain age.  This could mean that you help clean the house (no need for a maid), or you help take care of your younger siblinds (no need for child care), or you actually get a job to help support the household.  You can see glimpses of this if you watch the show 19 Kids and Counting (or is it 20 - I lost count).  Yes, that family doesn't appear to be destitute by any stretch, but what you will notice is that the older kids help quite a bit taking care of the younger kids, helping out with the cooking, cleaning, chores, etc.  The kids add lots of manpower/womanpower to the household to keep it going.

The last thing is that retirement wasn't something that was considered as an option.  Back then, people worked until they couldn't.  When they couldn't, having all the kids to help and support you was a blessing not a curse.  The kids were your retirement plan.

The point is that, in the not so distant past, kids were not expensive.  If anything, they were an asset to the household.  It only through the lens of today's society that they are perceived as a liability.

All that being said, no matter what the century, the merits of having children go way beyond the monetary!

Wednesday, October 6, 2010

Misleading Financial Post of the Week

I came across the following article on Yahoo! Finance where an individual by the name of Steve Thompson gives 10 reasons why he lives "mortgage-free".  By mortgage-free, the author doesn't mean that he has paid off his mortgage; he means that he is renting rather than owning.  With the tanking of the real estate market, more and more people are giving renting a second look.  For some, renting does make more sense.  However, Mr. Thompson makes a less than compelling case for why he rents.

First, he says that when you rent, you don't have to pay property taxes, aassociation fees, maintenance expenses, utilities, or homeowner's insurance.  While it is true that you don't have a separate bill for these things, what does that matter?  Yes, you don't have to write a separate check to the city, the homeowners' association, the handyman, the electric company, or the insurance company.  Instead you write one check to your landlord.  Big deal.  Unless you are worried about the cost of replacement checks, the only thing that matters is your bottom line cost.  The author even alludes to this by saying, "Unbeknownst to us, taxes might be built into our rent, but at least there are no surprises."  The only surprise is when the landlord decides to raise your rent... 

...or take a month to get back to you about the leaky faucet...

..or use the "low cost provider" when repairing the water heater...

...or forgets to pay the electric bill and suddenly the power is shut off...

Mr. Thompson adds idiocy to illogic by following up "Free Utilities" with "Lower Utilities".  I suppose free is lower than not-free.  However, his lower utilities logic comes from the fact that he has rented condos and townhomes, which are smaller than single-family houses.  That is true.  However, what does that have to do with renting versus buying?  It's not like you can't go out a buy a condo or a townhouse.  How does he think the landlord acquired his rental in the first place?  Besides, if his utilities are free, what does it matter how much his electric bill is? 

Next, he says that renting is less risky than owning.  Renting isn't less risky; it is just risky in a different way.  Yes, when you own you have the risk that the price of your home will drop.  However, when you rent, you have the risk that rental prices will go up and up.  Yes, when you own you have the risk of foreclosure.  However, when you rent, you have the risk of eviction plus the additional risk that your landlord will be foreclosed upon.  How would you like to pay your rent dutifully every money and still be kicked out of your home?  It seems pretty risky to have the possibility of being evicted for actions that are beyond your control.

In fairness, I do agree with him that renting can provide opportunities to invest.  However, that assumes two things.  First is that you actually end up saving money by renting versus owning.  When you have a mortgage, three things happen:  
  1. Part of your mortgage goes towards building equity in your house that you can get back when you sell.
  2. Part of your interest gets refunded to you on your taxes. 
  3. When you sell, you may not pay any taxes on the profit you made on the sale of your house.
These facts need to be taken into account when you factor in your savings between renting and owning.

The second assumption is that you actually invest the money that you are saving by renting.  That requires a certain amount of discipline that some people just don't have.

Finally, I happened to stumble across another article written by the same author where he states the following:

"If you've always rented your home, start thinking about buying. A house is an excellent investment in your future, and you will be much better off financially if you own your home upon retirement."

I can't make this stuff up!

Saturday, October 2, 2010

Predictions Sure To Go Wrong

One of the favorite parts of my morning routine is listening to Mike and Mike in the Morning on ESPN Radio.  One thing I love about them is that, unlike most of their contemporaries, they don't take themselves too seriously.  Like most sports talk shows, they make their own predictions, but in the spirit of the show, they refer to them as "Predictions Sure To Go Wrong".  They clearly understand that predicting who is going to win the weekend's game is an inexact science.  In fact, calling it an inexact science is an insult to true inexact sciences, like meteorology.  However, the most inexact of all sciences is predicting the stock market.

Consider Robert Kiyosaki of Rich Dad, Poor Dad fame.  I must admit, I have not read his many books, but I understand that he markets himself as a expert on making money (which, judging by his book sales, he is quite an expert at just that).  Mr. Kiyosaki has a column on Yahoo! Finance where he often writes about his economic predictions.  This past January, here was his prediction on how the stock market would do in 2010:

"Dead cat bounce. The current stock market rally will probably turn into a dead cat bounce. If the Dow drops below 6500, 5,000 may be the next stop."

In a subsequent article, he goes on to explain what he means by a "dead cat bounce":

"The market crashes, rebounds, and runs out of steam, then crashes again…unfortunately, and possibly, to a lower low.  When professional investors observe a ‘dead cat’ forming, many will begin to sell. If their selling leads to a panic, the stock market goes even lower."

When Mr. Kiyosaki made his "dead cat bounce" prediction on 12/29/2009, the Dow Jones Industrial Average was at 10,605.65.  Today, the DJIA is 10,829.68 for a gain of 1%.  Yes, it isn't a big gain, but it is a heck of a lot better than his doomsday prediction of 6500 or less.

In fairness, Mr Kiyosaki wasn't alone in predicting doom and gloom for the stock market in 2010:

 Like this:

"After the 1930 rally, the DJIA collapsed 86% -- which lasted two more years. If history repeats, that puts us at around 5000 in 2010 and 1400 by January 2012, and it will feel like the end of the world-- just like the Mayans predicted."

Or this:

"According to Hall's charts, it's because we're headed for a second dip, as the general slide into pessimism accumulates inertia, which leads to increased feelings of anger, fear, and polarization — and a general 'throw the bums out' sentiment. 'There's a pretty strong case that bear markets tend to track with incumbents losing their seats,' he told me. 'Obama rode that mood in, but now that he's in office his popularity has continued to decline.'"

Of course, for every doom and gloom prediction, you have a prediction list this:

"But there's a case to be made that there's still more upside in the stock market than pessimists might think--and it's entirely possible the Dow will hit the 12,000 mark in 2010."

Or even like this:

"As the real economy's challenges start to catch up with the ebullience of the stock market, and with no second wind to boost growth forward, the U.S. markets will face challenges in the second half of the year, as earnings growth doesn't materialize as expected. The Dow Jones Industrial Average will close roughly flat for the year."

That last one seems like it has the best chance of being accurate.

My point is that even the so-called experts who dedicate their lives to this stuff have no clue what is going to happen to the stock market.  In a previous article, I gave examples of how even professional money managers - people who are supposedly getting paid to pick the best stocks - can't seem to get it right either.  Even if they do get it right, usually it is because of dumb luck.  The phrase "even a blind squirrel finds a nut" comes to mind.

The thing to remember is that the stock market moves in unpredictable ways.  Who could have predicted the BP oil spill?  Who could have predicted the death of Senator Edward Kennedy?  Who could have predicted the widefires in Russia?  All of these events had impacts on the stock market, but yet nobody could have known they were going to happen.  Anybody who offers a prediction on the stock market is making a prediction sure to go wrong.  They are either deluded into thinking that they are an "expert", or they are looking to extract money from an unsuspecting public.