Lessons From the Galleon Insider-Trading Case

Edited By CRISTINA LOUROSA-RICARDO

Many ordinary investors, on hearing the guilty verdict in the insider-trading case of Raj Rajaratnam, manager of the Galleon hedge fund, will probably say it's another black eye for Wall Street and another reason to shun the stock market.
But it's not my take.
On the contrary, the verdict in the case carries some valuable positive lessons for anyone hoping to invest profitably.

Lesson 1: You can save the hedge-fund envy. Worried that big hedge funds won't let you in? Don't be. Most of them have underperformed a simple balanced portfolio of index funds over the past five or 10 years. And turns out even some of those who did produce good returns relied on illegal activities to do so.
Lesson 2: For investors, fund fees really matter. Hedge-fund managers like Mr. Rajaratnam have an incredibly high hurdle to beat. Most typically charge 2% of assets under management every year, and 20% of any profits. The higher the fees, the harder it is to generate great returns. No wonder some cut corners.
Lesson 3: Be deeply skeptical of anyone promising fabulous returns. Almost no one produces them. Hardly anyone produces them consistently. There really aren't any shortcuts to wealth. Trying to get rich quickly in the stock market is a project doomed to fail.
Lesson 4: Anyone investing in a stock should first ask themselves the following set of questions: "What do I know that the market doesn't? What's my edge? Why is the current market price wrong?"
Mr. Rajaratnam was making money because he knew things the rest of the market didn't. He came by that information illegally. But not all such information is illegal. You may have an edge on a stock because you know the industry better, or you've done your homework.
I am not an efficient-market cultist: I don't think the market is always right, all the time. But it's usually more right than wrong. So what's your edge?
—Brett Arends
WSJ.com

More for Your Used Car

The current trend with used cars has car owners and dealers scratching their heads: Many used cars have stopped losing value and, in some cases, they're actually worth more now than they were a year ago.
Used-car values spiked 16% in April from a year earlier, according to RVI Group's Used Car Price Index. A 2008 Ford Focus S sedan with 35,000 miles would have sold for $7,525 in May 2010, according to Kelley Blue Book; this month, a seller could reasonably expect $9,600.
One of the main reasons: During the recession, car sales sank, so today there are fewer late-model used cars to sell.
Here are three options for making the most of your car's value.
Work the private market. Consumers who sell their car to a private party have the best shot at unloading it near or at its current market value; trading in a car at a dealership often knocks 5% to 10% off the price, says Jesse Toprak, vice president of industry trends for TrueCar.com.
Sellers should ask potential buyers whether they're planning to pay in full with cash. If not, they should ask buyers if they've been preapproved for a car loan and if they can provide a preapproval letter.
Trade it in for a new car. While car owners will probably get less than they would in the private market, they'll still likely receive more than they would have a year ago, says Alec Gutierrez, manager of vehicle valuation at Kelley Blue Book.
For drivers about to come out of a lease, in many cases the so-called residual value -- the amount a dealership estimated the car would be worth after the leasing period -- is lower than the current market value, says Mr. Gutierrez. So consumers can visit competing dealerships to find out how much they're willing to pay for the car.
Keep the car. If it's a relatively recent model, it may be a decent car. There's been a 5% average annual decline in reported car problems between 2006 and 2009, according to a 2010 study by J.D. Power and Associates. Another advantage is that you avoid financing.
—AnnaMaria Andriotis
SmartMoney.com

Not-So-Boring Bonds

You might think savings bonds are boring, but right now compared to other types of fixed-income investments they're looking pretty good -- especially when factoring in their tax advantages.
Series I bonds: Series I bonds are inflation-adjusted. A fixed rate is determined upon issuance and that applies for the entire 30-year life of the bond; in addition, a variable rate based on the current inflation rate is reset twice a year.
These bonds earn interest for up to 30 years or until redemption, whichever comes first. And they receive favorable tax treatment: You don't owe any taxes for the accrued interest until the year the Series I bonds mature or you cash them in.
The maximum amount of paper Series I bonds you can buy for yourself is $5,000 annually. But you can buy up to another $5,000 of electronic bonds each year. You can also buy up to $5,000 of paper Series I bonds and up to another $5,000 of electronic bonds annually for another individual.
Series EE bonds: These bonds don't adjust for inflation. But like Series I bonds, they earn interest for up to 30 years or until redemption, and the interest income receives the same favorable tax treatment. They also are subject to the same annual purchase limits.
With both types of bonds, accumulated interest redeemed to pay college tuition and fees can be free of federal income tax. But there are income and age limits.
—Bill Bischoff
SmartMoney.com —The Aggregator features news and commentary from The Wall Street Journal and other publications. Email: cristina.lourosa@wsj.com