Thursday, November 16, 2017

habit of the wealthy

Financial success, and what it means to be wealthy, is in the eye of the beholder—what’s probably not in dispute is that many of us want to learn the habits of the wealthy to reach and maintain our wealth potential.

Different people take different paths to becoming rich, and it’s not just about securing a desk in the C-suite, striking it rich in Silicon Valley, or snagging that lucky lottery ticket.

In fact, many of the to-dos on the path to wealth have little to do with earnings. Wealthy people tend to practice habits that are designed to both protect and grow their investments and help them keep body and mind in balance, experts say.

First, some parameters: Just what is “wealthy”?

Wealth is “definitely a relative term,” says Robert Siuty, Senior Financial Consultant at TD Ameritrade. “Some of my clients with $5 million or more in assets don’t consider themselves wealthy.”

Still, the old “millionaire” tag continues to be synonymous with wealth, Siuty says, so it’s a good benchmark—more precisely, a person with $1 million-plus in ready cash and other liquid assets (as opposed to illiquid assets, such as homes or retirement and brokerage accounts).

So here are a few habits of the wealthy.

Don’t Obsess About Your Salary or Where you Came From

You don’t have to be a high-income one-percenter to be wealthy. Some of Siuty’s clients never made more than $60,000 to $70,000 a year, “but did a very good job of managing overall expenses,” he says.

“They may be sitting on several million dollars simply because they started early, they saved as aggressively as they could afford to, and they invested that money and let that money stay invested over the long haul,” Siuty says. “Wealthy people come from all walks of life—they really, truly do.”

According to the 2016 U.S. Trust Insights on Wealth and Worth report, 77 percent of 684 high net worth adults surveyed said they grew up “middle class or lower,” including 19 percent who grew up “poor.” Just 10 percent of their wealth was inherited. (U.S. Trust is Bank of America’s private wealth management arm.)

#1 Rich People Habits: Pay Yourself First

Basically, it’s about having your financial and budgeting ducks in a row. Wealthy people tend to save a portion of each paycheck. They make sure the usual bills are squared away every month, while setting aside enough to build and maintain an emergency fund. “Anything in excess of that reserve, they invest,” Siuty says.

One key to building wealth is setting a budget and sticking to it. Wealthy people know how to hold the line on discretionary spending items that can help them increase the “invest” portion of their monthly budget.

#2 Look Ahead—Way Ahead—on Your Goals

Wealthy people typically set concrete goals, both personal and financial, and have a long-term focus stretching years, if not decades, down the road—the longer, the better. “Understand that it’s about time—the power of compounding returns, in other words—that allows you to accumulate wealth,” Siuty says.

The rich understand that it starts with personal goals—what you want to get out of life and how you might prioritize your list. And once you have an idea that you want to accomplish personally, you can plot a financial road map to help steer you there.

In other words, the path to wealth can involve starting early and focusing on the long term. If your financial goals are clear and you’ve planned well, you don't necessarily need to follow every market tick. But you should be aware of how your portfolio performed on a quarterly or annual basis and be ready to rebalance assets if necessary.

#3 Do Your Homework, Keep Your Cool

Markets go up, and markets go down—often suddenly and for no apparent reason. Define your comfort level with risk, keep your emotions in check, and recognize what you can and can’t control.

Wealthy people tend to understand the dynamics of the market and avoid making rash decisions, Siuty says. “They don’t let the market rattle them,” he says. “They actually may turn a bear market into advantage by buying assets cheap.”

Siuty says there’s no “secret sauce,” except that to build wealth it helps to “stay disciplined, be methodical, and not let emotions get the better of you.”

#4 Lead a Nonlavish Lifestyle

News flash: Wealthier folks tend to be more value-conscious and budget-driven in their spending and often shy away from big-ticket purchases or expensive toys they may not need.

“Instead of buying the $2 million house, they might buy something that’s one-third or one-quarter of that price,” Siuty says. “Less money to heat it, less to cool it, less in property taxes.”

And wealthy people generally understand the difference between price and value. In other words, they’re not afraid to open the pocketbook, but they tend to expect value in return.

#5 Turn Off the TV, Pick Up a Book

According to Thomas Corley, author of Rich Habits: The Daily Success Habits of Wealthy Individuals, 67 percent of the rich watch TV for one hour or less a day. Only 6 percent of the wealthy watch reality shows, he wrote, while 78 percent of the poor do.

Corley, a CPA and CFP, found that 86 percent of the wealthy “love to read,” with most of them reading for self-improvement.

#6 Get Up Early, Eat Healthy, Exercise

The wealthy tend to get a jump on others and squeeze more out of their days, and they monitor their health and eating closely.

According to Corley, 57 percent of wealthy people count calories every day, while 70 percent eat fewer than 300 calories of junk food per day. Some 76 percent do aerobic exercise at least four days per week. Self-made billionaire Richard Branson, for example, is reported to wake up around 5 a.m. to work out before starting his day.
Correlation, Not Necessarily Causation

Of course, these are tendencies, not guarantees, so practicing yoga, reading a book, and setting your alarm ahead won’t magically grow your investment account balance. But seeking a life of balance in mind and body, as well as in saving and investing, can help put you on the right path and help keep you from straying from that path.

And the earlier you start, the better.

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Saturday, October 28, 2017

changing sweep accounts

My E*Trade account is currently earning a measly 0.01% interest (in the E*Trade Financial Extended Insurance Sweep Deposit Account).

However I see you can change the sweep account to HTSXX (JPMorgan 100% US Treasury Securities Money Market Fund) which is currently earning a whipping 0.50%.

Here's how to change your sweep account at E*Trade.

In the very top menu on the broker’s website, select ‘Customer Service’. On the next page, click on ‘Self Service’ and then select ‘Change / Update Uninvested Cash Option’ under ‘Cash Management (Deposits, Transfers and Withdrawals)’. Doing so will produce a new page with a drop-down menu of the available core position options. Select the one you want and follow the prompts.

***

For Schwab customers, I've noticed on their statements that SWVXX (Schwab Value Advantage Money Fund) is now yielding higher than Schwab Cash Reserves (0.90% to 0.67%).  You can't set it up as a sweep account (as far as I know), but you can transfer back and forth from Cash Reserves to SWVXX.  So that's what I've started to do.

***

For Fidelity customers, earlier this year (2/13/17) I noticed that my CASH in my Fidelity account was getting 0.01% while my Fidelity Government Cash Reserves (FDRXX) in my IRA was getting 0.27%.  (Looking back it had been at 0.01% as recently as February 2016).

I wasn't able to switch my non-IRA account to FDRXX, the options I saw were SPAXX (Fidelity Government Money Market) and FZFXX (Fidelity Treasury Money Market).  Morningstar reported that FZFXX was yielding 0.16% while SPAXX was yielding 0.20%, so I switched it to SPAXX.

Looking at Morningstar, FDRXX is yielding 0.74%, SPAXX is yielding 0.68%, and FZFXX is yielding 0.69%.  I'll stick with SPAXX for now.

***

I sure wish E*Trade had told me about this months ago.  I had to find out myself.  I looked because both Schwab and Fidelity were giving me much higher rates than E*Trade and TD Ameritrade.  So far I haven't found a good option for TD Ameritrade cash.  So currently I'm sweeping excess cash to Ally Bank savings (currently paying 1.25%).  The disadvantage is that it takes like 3 days for the transaction to complete.

Friday, October 27, 2017

predicting the market

There are two popular schools of thought re market timing. One is that it is impossible to time the market effectively and a waste of effort to try. The other is that knowing when crashes are coming is so valuable that you just have to give the objective of predicting them your best possible shot.

I hold a third view, a view which I believe is strongly supported by the research of Yale University Economics Professor Robert Shiller and research (including one paper that I did most of the work on myself!) done over the past 32 years (and largely ignored so far!). That view holds that short-term timing (predicting when crashes will come with precision) really is impossible but that predicting in a general way when they will come (long-term timing) is highly doable and absolutely required for those seeking to hold any realistic hope of long-term investing success.

Shiller's model uses valuations to make long-term predictions. Once prices go insanely high, we ALWAYS experience a wipe-out. There has never in 140 years of stock market history ever been an exception. But we CANNOT say with precision when the wipeout will come, only that it is on its way.

There is a wipe-out on its way today, according to the Shiller model. Thus, I think it makes sense to go with a low stock allocation today.

Now --

We may see stock prices double over the next year. If we see that, there are people who will complain that I was "wrong" in my advice.

I don't see it that way. The way I look at it is that the RISK of a crash is high this year. Thus, we all should be going with low stock allocations. It doesn't matter whether stocks actually crash this year or not. The risk is there. That's what matters.

Those who stay in stocks and enjoy another run-up in prices will NOT get to keep the money. They will lose all those gains plus a lot more in the crash that will follow next year or the year after that. So what good do those gains do them? I invest for the long-term. I want gains I can keep. Investors have never earned permanent gains from stock purchases made when stock were selling at the sort of prices at which they are selling today.

The losses you will see if stocks continue to perform in the future anything at all as they have always performed in the past will be devastating. It is hard for people to get their heads around how much one wipeout in a lifetime can hold you back. You lose not only the dollar value taken from your portfolio, you also lose decades of compounding returns on those dollars. Stay heavily in stocks at a time like today and you could easily set your retirement back 10 years, according to the last 30 years of academic research.

The "experts" won't tell you this. Most of the "experts" in this field make money only when people buy stocks. So they are compromised. You need to become personally familiar with what the academic research really says, not just what the people quoted as experts in this field SAY that it says. These are very, very, very different things, in my experience. The conventional wisdom in this field is dangerous stuff.

Rob Bennett, Created The Stock-Return Predictor
Answered May 9, 2013

***

This answer showed up in my quora feed last night, but was posted on 5/9/13.  The Dow closed at 15,082.62 on that day.  Today it closed at 23,434.19.  Yes, one day/week/month, the market will crash again.  Here's how Buffett prepares.

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Wednesday, October 25, 2017

Morningstar ratings

Millions of people trust Morningstar Inc. to help them decide where to put their money.

From pension funds to endowments to financial advisers to individuals, investors rely on Morningstar’s star ratings to help divide $16 trillion among America’s mutual funds, in much the way shoppers use Amazon’s ratings to pick products. A lot of these investors, and the people paid to guide them, take for granted that the number of stars awarded to a mutual fund is a good guide to its future performance.

By and large, it isn’t.

The Wall Street Journal tested Morningstar’s ratings by examining the performance of thousands of funds dating back to 2003, shortly after the company began its current system. Funds that earned high star ratings attracted the vast majority of investor dollars. Most of them failed to perform.

Of funds awarded a coveted five-star overall rating, only 12% did well enough over the next five years to earn a top rating for that period; 10% performed so poorly they were branded with a rock-bottom one-star rating.

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EquBot

As if professional mutual fund managers didn’t have it hard enough.

Not only do they have to contend with the growing popularity of low-cost index funds, which simply buy and hold the entire market, but now here comes another threat: robot stock pickers.

That’s right.

The San Francisco firm EquBot has launched the first retail ETF to be managed using IBM’s Watson supercomputing artificial intelligence technology.

The use of computers to buy stocks isn’t new. So-called “quant funds” (short for quantitative analysis) have been around for years, relying on computer algorithms to identify short-term trading patterns and opportunities in the market.

But the AI Powered Equity ETF (AIEQ), which launched late last week, differs in that it is uses artificial intelligence to pick stocks in much the same way humans have for decades—by ranking investment opportunities on a variety of factors, including fundamentals such as profit growth and valuations.

EquBot notes that its AI technology can do humans one better because it can process over 1 million pieces of information a day—including earnings releases, economic data, consumer trends, industry developments, and headline news—to constantly update its assessment on roughly 6,000 publicly traded companies.

It then uses that computing power to select 30 to 70 stocks to own “based on their probability of benefiting from current economic conditions, trends, and world- and company-specific events,” according to a recent release.

“EquBot AI Technology with Watson has the ability to mimic an army of equity research analysts working around the clock, 365 days a year, while removing human error and bias from the process,” said EquBot CEO and co-founder Chida Khatua.

The fund’s AI technology also benefits from “machine learning,” he added—meaning it can learn as it goes, without having to be reprogrammed by humans.

So far, in its first few days of trading, the fund has gained 0.7%, according to Morningstar. That beats the 0.5% for the S&P 500 index.

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Tuesday, October 24, 2017

delayed gratification

A Stanford University experiment demonstrated that one of the most important determinants of a person's future wealth was the capacity for delayed gratification. They put children alone in a room and gave them each a marshmallow and told the children that if they didn't eat the marshmallow they would be given a second marshmallow, and they would then have two. Many years later the children that were able to resist temptation and did not eat the marshmallow were significantly more economically successful than the ones that ate their marshmallow. In fact, the ones that were able to delay gratification tested better in a number of ways, got higher SAT scores, were healthier, and more successful in everything they did.

-- Saulius Muliolis, quora

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Tuesday, October 17, 2017

Soros gives away $18 billion

George Soros just gave most of his wealth to his charitable organization, the Wall Street Journal reported Tuesday.

The billionaire philanthropist transferred $18 billion to Open Society Foundations, a sprawling international group of charities that works in more than 100 countries on projects focused on refugee relief, public health and many other topics.

The $18 billion figure amounts to almost 80 percent of the financier's total net worth. Before the transfer, Soros had a net worth of $23 billion, according to a Forbes tally Tuesday. The site ranks him as the 29th wealthiest person in the world.

Soros began his charitable giving in 1979, nine years after launching Soros Fund Management, the hedge fund that would propel him into America's ultrawealthy. He has given away $12 billion in the four decades since, according to his official biography, available on his website.

His first charitable work involved providing black South Africans with scholarships during the country's apartheid. During the Cold War, he provided photocopiers to people living in eastern Europe in order to reprint texts banned by communist governments. He has also underwritten the largest effort to integrate Europe's Roma, according to the biography available on his website.

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Tuesday, October 10, 2017

greatest wealth creators since 1926

In the history of the markets since 1926, Apple has generated more profit for investors than any other American company.

In a phone conversation, Professor Bessembinder reminded me that the stock market is a moving target and that his rankings, while valid through the end of 2016, don’t capture the sharp movements of this calendar year. In his 2016 rankings, Exxon Mobil, not Apple, appears at the top, with net wealth creation of more than $1 trillion. Apple lags at about $745 billion.

But it has been a wild year. Exxon Mobil shares have declined more than 11 percent at a time of weak energy prices, while Apple, which just introduced a raft of new iPhones, is on a spectacular stock surge, gaining more than 37 percent.

Run the numbers as I did, and it’s clear that at this moment, Apple has pulled ahead of Exxon Mobil, with total net wealth creation of somewhere in the vicinity of $1 trillion.

As I wrote in July, Amazon, which started trading in 1997, has soared to the 14th spot. Although it hasn’t been in existence long compared with Exxon Mobil, its annualized return is the highest in the list, 37.4 percent through December. A group of young companies have also had remarkable results.

Facebook, which started trading in June 2012, is the youngest on the list, with an annualized return of 34.5 percent. Visa, which had its initial public offering of stock in 2008, is the second-newest company, with a 21 percent annualized return, followed by Alphabet (Google), ranked 11th with a 24.9 percent annualized return.

And then there is that great wealth machine, Microsoft, ranked as the third-greatest wealth creator. Since 1986, it has had an annualized return of 25 percent, making its founder, Bill Gates, the richest man in the world, with a net worth of more than $87 billion, according to Bloomberg.

No list of wealth-generating companies is complete without Berkshire Hathaway. It ranks 12th, just behind Alphabet, with an annualized return of 22.6 percent. By comparison, Exxon Mobil’s annualized return was only 11.94 percent.

Anyone who invested in Apple or Microsoft or, really, in any of these companies at their inception and just held on did extraordinarily well. You might look at that record and conclude that you should just buy the best companies as a foolproof way to get rich.

If only it were that easy.

How do you find those companies? Not here.

“The problem is, I have no idea which companies will generate the best returns over the next 10 or 20 or 30 years, “ Professor Bessembinder said. “Probably it will be some companies we’ve never heard of. Maybe it will be companies that don’t even exist now.”

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Friday, September 29, 2017

the value of a stock idea

The value of a stock idea can come from a combination of four sources:
  1. How much money you put in the idea.
  2. How cheap the stock is.
  3. How fast the stock is compounding its value.
  4. How long you own the stock.
The ideal stock would be a business quickly compounding its intrinsic value per share, which you are able to buy at a deep discount to intrinsic value, which you feel confident allocating a big chunk of your portfolio to and which you are going to hold for a very long time.

Take Buffett’s investment in Coca-Cola for example. This was considered a big bet by Berkshire. By my calculations, however (admittedly, very approximate based on the data I have), Buffett allocated perhaps just under 20% of his entire stock portfolio to Coca-Cola at the time he built the position. Despite putting just 20% of his portfolio into the stock in the late 1980s, however, Berkshire ended up not only with a position that today is worth about 13 times what he originally bought – the one position alone is also worth several times what Berkshire’s entire portfolio was when he made the Coke investment.

How did he do that?

Let’s look at the four ways to get the most out of a stock idea:
  1. You can put a lot into the stock (Buffett put 20% of his portfolio into Coke).
  2. You can hold the stock a long time (Buffett has now owned Coke for just under 30 years).
  3. The stock can compound is intrinsic value at a high annual rate (Coca-Cola compounded EPS at about 11% a year for the first 25 years Buffett owned the stock).
  4. You can buy the stock when it is cheap (the P/E on Coke went from 15 when Buffett bought it to 30 recently).
Coke is pretty close to a perfect example of some value coming from all four possible sources of getting the most out of an idea.

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Whitney Tilson shutting down hedge fund

(Reuters) - Whitney Tilson is closing his hedge fund Kase Capital, and will return capital to investors, he said in a letter to clients.

Tilson cited “high prices and complacency that currently prevail in the market” as main reasons for shutting down his fund.

“Historically, I have invested in high-quality, safe stocks at good prices as well as lower-quality ones at distressed prices,” Tilson wrote to clients on Sunday.

“... However, my favorite safe stocks (like Berkshire Hathaway and Mondelez) don’t feel cheap, and my favorite cheap stocks (like Hertz and Spirit Airlines) don’t feel safe. Hence, my decision to shut down.”

Kase Capital follows a spate of other notable funds that have gone out of business this year, including Eric Mindich's Eton Park Capital Management, and John Burbank's Passport Capital, which recently announced plans to shut its long-short equity fund. reut.rs/2fuEDoI

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Tuesday, September 26, 2017

buying at the peak

If you bought the S&P 500 at this time 10 years ago, you watched more than half your investment erased. You heard buy-and-hold pronounced dead and watched fellow investors pull $200 billion from equities.

You also doubled your money.

Or just about, anyway. Using a version of the S&P 500 that reinvests dividends, the index has now pushed its gain since its Oct. 9, 2007 top to 98 percent. Down 55 percent at the market low in March 2009, the benchmark gauge has made all that back plus a lot more, posting annualized gains of more than 7 percent for a decade.

“It was in the early 2000s and again 2008, where a lot of market pundits came out and said, ‘that’s the end of 10 percent a year for stocks,”’ said Rich Weiss, the Los Angeles-based senior portfolio manager at American Century Investments. “Stocks have done what they almost always have done and proved yet again that even with the 2008 disaster, they return 7, 8 percent a year annualized."

[On October 11, 2007, I sold some AMZN at 95 for about a triple of shares bought in 2005.  It closed at 939 today.]

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Friday, September 01, 2017

Reitmeister 2017

[9/1/17] It is hard to believe that this is my last Profit from the Pros message. Yet after 16 years of being the head of Zacks.com it is time for a new adventure. Gladly that adventure continues with Zacks...just in a new and exciting capacity.

Zacks.com had just 20 employees back when I started. Now that is nearly 200.

The website traffic has grown 12 times over.

And our valuable ratings are now in the hands of many, many more investors who use it to improve their financial well-being. That is the most gratifying part of all.

I leave you in the very capable hands of Kevin Matras who will take over the helm of Zacks.com and the writing of Profit from the Pros on a daily basis. No doubt you already know Kevin from all of his expert investment commentaries over the years. Most popular of which are his keen market outlooks and Screen of the Week articles.

Please do yourself a favor and keep making Zacks a part of your daily investment diet. I have no doubt that it will help you achieve investment success for many years to come.

Best,

Steve Reitmeister

[8/9/17] The S&P made new highs Tuesday getting ever closer to 2500. Then right around noon investors got a case of high anxiety with stocks recoiling a bit, but still in profitable territory.

Just before the closing bell the real fireworks began. That came in the form of some tough talk from the White House that any North Korean aggression will be met with "Fire and Fury".

Since this is an investment publication, we will stay focused on what this means for the market. First, we are used to a lot of bluster from North Korea with no serious action taking place. So, this likely leads to nothing and investors ignore the situation.

Now let's imagine that military action does take place. North Korea is a paper tiger that is easily toppled. (Heck, if you gave me a month with nothing to do, I likely would have a more impressive military arsenal than they do and feed the people and keep the electricity running....but that is beside the point ;-) The reality is that the stock market likes war and typically rises after fighting commences. Some call it a patriotic response by investors.

To be clear, I don't like rooting for war as a catalyst for the stock market. There are plenty of other reasons to be bullish. I just want you to have the correct view of this situation. And that is to realize these issues with North Korea should not cause any continued downside to the market.
 
[5/10/17] Stocks flirted with their first real breakout above 2400 on Tuesday. Early in the session the S&P got as high as 2404 when investors got altitude sickness leading to a close just a notch below.

I truly believe we will soon break above 2400 touching 2450 or even 2500 before the next consolidation period. And as noted yesterday, it should be a Risk On rally with smaller and growthier companies leading the charge.

Sometimes you need a positive catalyst to create a breakout of this nature. However, other times the fundamental backdrop is solid and it is the lack of negative news that gives a green light for stock advances. I sense that will be the case this time around.

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Wednesday, August 23, 2017

80 > 50 (0.2% > 43%)

New data from the Internal Revenue Service show just how old the top millionaires and billionaires in the U.S. are. While people over 80 make up only 3.7 percent of the population, the IRS estimates they control a larger share of the nation's top fortunes than people under 50.

The latest study, released this month and estimating personal wealth in 2013, finds 584,000 Americans, or about 0.2 percent of the U.S. population, with a combined net worth of $6.9 trillion. People in their 80s and 90s control $1.2 trillion of that wealth. Adults under 50, roughly 43 percent of the population, hold barely $1 trillion.

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Monday, August 14, 2017

Unlucky 7

Finally, it's a year ending in 7. Where is she going with this one, you may be thinking? More attention is being devoted to this phenomenon recently—including in Barron's this past weekend and in The Leuthold Group’s famous "Green Book" for August —given that we are heading into the period in the year when weakness was often most pronounced in those years. Perhaps it's "mystical," as Barron’' opined; or perhaps it ties into the economic or even political cycles; but the pattern is there nonetheless. As you can see in the chart below, nearly every year ending in 7 since the dawn of the Dow Jones Industrial Average has experienced at least a 10% correction … except 1927—when it came close—and this year, so far.

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Thursday, July 27, 2017

Bezos no. 2 / make that no. 1

[7/27/17] Bezos passes Gates this morning to become the richest man in the world.  Asking for ideas on philanthropy.

[7/24/17] For the 30 years FORBES has been tracking global wealth, only five people have ranked on our annual compendium of wealth as the richest person on the planet. At least one other person held the title, but so briefly (just two days), that he never appeared at that rank on FORBES’ annual list of World’s Billionaires.

Now, Amazon CEO Jeff Bezos is poised to join this exclusive single digit club, as Amazon stock continues to soar. The online retailer’s shares climbed 1.3% on Monday, adding $1.1 billion to Bezos’ net worth. Bezos is now a mere $2 billion from assuming the No. 1 spot on FORBES Real-Time Billionaires List, which would put him in the company of an exclusive group of billionaires who have held the title. Bezos has a net worth FORBES estimates at $88.2 billion as of the close of markets on Monday, while Microsoft founder Bill Gates holds the top spot on the list with a $90.1 billion fortune.

[3/30/17] Jeff Bezos has leapt past Amancio Ortega and Warren Buffett to become the world’s second-richest person.

Bezos, 53, added $1.5 billion to his fortune as Amazon.com Inc. rose $18.32 on Wednesday, the day after the e-commerce giant said it plans to buy Dubai-based online retailer Souq.com. Bezos has a net worth of $75.6 billion on the Bloomberg Billionaires Index, $700 million more than Berkshire Hathaway Inc.’s Buffett and $1.3 billion above Ortega, the founder of Inditex S.A. and Europe’s richest person.

Amazon’s founder has added $10.2 billion this year to his wealth and $7 billion since the global equities rally began following the election of Donald Trump as U.S. president on Nov. 8. The rise is the third biggest on the Bloomberg index in 2017, after Chinese parcel-delivery billionaire Wang Wei’s $18.4 billion gain and an $11.4 billion rise for Facebook Inc. founder Mark Zuckerberg.

Buffett, who’s added $1.7 billion in 2017, has shed $4.7 billion since his fortune peaked at $79.6 billion on March 1. Ortega is up $2.1 billion year-to-date. Bezos remains $10.4 billion behind Microsoft co-founder Bill Gates, the world’s richest person with $86 billion.

*** 5/15/17 ***

Jeff Bezos, founder and CEO of Amazon, is one of the most powerful figures in tech, with a net worth of roughly $82 billion.

Today, his "Everything Store" sells more than $136 billion worth of goods a year.

Here's how the former hedge funder got his start and became one of the world's richest people.

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Friday, July 21, 2017

the minimum wage

[1/23/13] Governor Abercrombie is proposing a hike in the minimum wage saying it would help the economy.

But would it?

Googling, I find this December 2012 article at learnvest (the author FWIW is Gabrielle Karol who has a B.A. in English from Yale -- so she's not an economics expert but is presumedly smart and should be able to think/write clearly enough to be understandable).

this summer, the Fair Minimum Wage Act was introduced in Congress to raise the minimum wage from $7.25 to $9.80 and index it to inflation, making it a current political issue. Though the bill is currently sitting with a committee awaiting further action, if it passes, it could significantly change millions of Americans’ answer to the question: Are you better off than you were four years ago?

The first minimum wage law was passed in 1938, guaranteeing workers at least 25 cents an hour (woo!). The heyday of the minimum wage was in the late 1960′s, when the wage was high enough relative to the cost of living to provide a secure income. Since then, it’s risen slowly but surely to $7.25 an hour, which adds up to $15,080 a year for full-time employees.

While the dollar amount has increased over time, the real value has not—it has declined by 30% since 1968, because over the years, the minimum wage has not kept pace with inflation, which is the increase in the general cost of goods and services over time. That means workers aren’t getting as much bang for their buck, so to speak. (Find out why inflation is expected to rise very soon.)

The yearly $15,080 made by a full-time minimum-wage worker, who typically works in retail or food preparation, or as a personal and home care aide, office clerk, customer service rep, waiter/waitress or construction laborer, is below the poverty level for a two-person household. And for tipped workers, the minimum wage is even lower—a measly $2.13 an hour. [so make sure to leave your tips]

While the minimum wage barely provides a solid living as is, studies have shown that workers earning the minimum are actually being underpaid by their employers. A 2008 study of low-wage workers in Chicago, Los Angeles and New York showed that 26% were paid less than the minimum wage, 70% worked off the clock before or after their shift and 76% were underpaid for overtime hours. All told, this resulted in an average loss of $2,634 in earnings for these workers.

Proponents of the Fair Minimum Wage Act argue that raising the minimum wage to $9.80, and then “indexing” it to inflation so it rises at the same rate would help ensure that these low-wage earners would take home enough salary to live on and pay for basic goods and services. But would it?

A living wage ensures that a worker can pay for basic necessities like housing, food, transportation to work and health care. A common definition states that the living wage should be high enough that no more than 30% of take-home pay needs to be spent on housing.

But full-time employees being paid the current minimum wage will have incomes below the living wage in most areas of the country. In dollar terms, that means that if you are a full-time worker supporting a family of four on the current minimum wage, your household income is $7,000 below the poverty line. Proponents of raising the minimum wage to a living wage argue that doing so would give workers and their families a better chance of climbing out of debt and poverty.

As an increasing number of workers take on low-wage jobs, poverty in the United States has increased: In 2005, 12.6% of Americans were living in poverty, compared to 15.7% this year (almost 50 million citizens)–the highest rate of poverty since 1965. Raising the minimum wage to a living wage would hopefully help to reverse this trend.

Higher wages don’t just benefit the individual earner, they also help the economy at large by increasing consumer spending. One 2011 study by the Chicago Federal Reserve Bank showed that every dollar added to the hourly minimum wage resulted in $2,800 in yearly additional consumer spending by that worker’s household.

Additionally, a 2009 study from the Economic Policy Institute predicted that upping the minimum wage to $9.50 an hour would result in $60 billion in additional spending over two years. Furthermore, this additional consumer spending would lead to more job creation—an estimated 100,000 new full-time jobs.

Many workers who earn more than the minimum wage—28 million, in fact—would also see their earnings increase as a result of raising the minimum wage, says the Economic Policy Institute. Why? The minimum wage is seen as the base number from which their wages are calculated, so if that number is raised, their earnings will increase accordingly … which will lead to even more consumer spending.

With all the seeming benefits to raising the minimum wage, is there a compelling reason not to raise it, at the very least to a living wage? And why shouldn’t it be indexed to inflation?

Those opposed to raising it often argue that doing so will put too great a strain on employers concerned with keeping costs down, which will ultimately lead to companies being forced to slash jobs to stay afloat. However, economists like Arindrajit Dube of the University of Massachusetts-Amherst showed that over a 16-year period, areas that raised the minimum wage did not see more employment loss than comparable areas with lower minimum wages.

While over 100 Democrats helped to introduce the bill in the House of Representatives during the summer to raise the minimum wage, most Republicans will likely argue that the fragile economy prohibits such a drastic change to the minimum wage. Though President Obama campaigned in 2008 on the promise to raise the minimum wage, he has not been active in that fight in some time, and in March, Mitt Romney retracted comments he had made as recently as January saying that he would like to see the minimum wage indexed to inflation.

Despite the likely political standstill on the minimum wage issue, recent polls have shown that 70% of Americans support raising the minimum wage and believe that doing so has the power to help the economy in these uncertain times.

[So thinking it over, raising the minimum wage would force the employers to spend more on wages (assuming they don't have an offsetting amount of layoffs).  But then they would probably raise prices to offset the increase in costs.  The increased wages would be be likely totally spent by the minimum wage workers (rather than saved) and pumped back into the economy.  And it would eventually back up to the employers.  So the money would be circulating more.  Which is what you want for the economy.  But then the increase in prices would be more inflation.]

*** 4/27/14

Buffett not arguing against raising the minimum wage, but suggests that increasing the earned income tax credit may be a better way to attack the problem.

*** 5/5/14

Economists everywhere may soon be thanking Seattle Mayor Ed Murray. Not because of his inspired policymaking, but because Murray seems ready to turn his city into a gigantic laboratory for one of the most ambitious, and quite possibly misbegotten, labor market experiments in recent memory.

Yesterday, Murray announced a plan that would gradually raise Seattle’s minimum wage to $15 an hour and tie it to inflation, which won approval from a large committee of business and labor leaders, as well as some city council members. Today, Washington state’s minimum is a comparatively piddly $9.32. The full council still has to consider Murray’s proposal, but should it pass, Seattle might not just have a far higher minimum wage than its surrounding suburbs, where businesses can easily move; it might well have the highest minimum wage in the world.

I generally support a higher pay floor. And I love a good experiment. But I can’t help but wonder if Seattle is poised to take a step too far.

*** 7/21/17

Here's a study on what happened when Seattle raised their minimum wage twice.

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Thursday, July 20, 2017

best performers since 1980

I’ve been doing some catch-up reading on banks recently and bumped into this fascinating table from a recent presentation by M&T Bank (NYSE:MTB). This table shows the best 30 stocks (as of May 31) out of the entire universe of 567 U.S.-based stocks traded publicly since 1980.



Of course this is not the list of the best 30 companies. For one thing, it doesn’t include any company that went public after 1980 so many of the best-performing stocks since then have been left out including biotech companies such Amgen (NASDAQ:AMGN) and Biogen (NASDAQ:BIIB) and internet companies such as Priceline (NASDAQ:PCLN). [Not to mention Microsoft.]

But there are so many interesting things about this table.

Fourteen companies have compounded faster than Berkshire Hathaway (NYSE:BRK.B), although a few by just the tiniest bit, including names that I would not have thought of such as Hasbro (NASDAQ:HAS) and Valspar Corp. (NYSE:VAL), which has just been acquired by another surprising top performer Sherwin-Williams Co. (NYSE:SHW).

I would never have guessed that Eaton Vance Corp. (NYSE:EV) topped the list with a whopping 23.3% CAGR.

Financials, industrials and consumer stocks dominate the list. There are seven financial stocks, 11 consumer stocks and five industrial stocks.

There were only two materials companies (now only one with Sherwin-Williams acquiring Valspar), one information technology company, one energy company and zero utility companies. I’m actually very surprised that there is an energy company on the list. Maybe there’s something special about HollyFrontier (NYSE:HFC).

Berkshire Hathaway and Warren Buffett (Trades, Portfolio)’s favorite sectors are financials, consumers and industrials.

Of the list 10% are specialty retailers, a segment that has been absolutely crushed recently by the Amazon (NASDAQ:AMZN) effect. Can Gap (GPS), L Brands (LB) and V.F. Corp. (VFC) ride out this Amazon storm and continue their 37-year track record?

The following companies did not surprise me: TJX Companies (TJX); Stryker (SYK); Danaher (DHR); Walmart (WMT); Berkshire Hathaway; M&T Bank; Walgreens (WBA); Astronics (ATRO); and Church & Dwight (CHD).

***

Here's Grahamites follow-up article on the best performers for the last decade.  Topping the list was Netflix.  AMZN is tenth.  AAPL is 40th.  ROST is 45.

A few observations:

None of the companies on the since-1980 top-30 list made it to the top 60 list for the last decade.

Very few stocks on the top 30 list made it guru investors’ portfolios. Most notably, Transdigm (NYSE:TDG) is owned by Wally Weitz, Priceline (NASDAQ:PCLN) owned by Dave Rolfe and Ebix (NASDAQ:EBIX) is owned by our lovely founder Charlie Tian.

Technology and biopharmaceutical companies dominated the list. Three of the FAANG stocks made the top 60: Netflix (NASDAQ:NFLX), Amazon (NASDAQ:AMZN) and Apple (AAPL). Google’s parent company Alphabet (GOOG) surprisingly only ranks No. 299 with a 10-year annualized return of “only” 13.5%. Equally impressive is the new biotech giants such as Regeneron (NASDAQ:REGN) and Incyte (NASDAQ:INCY) with mind-blowing 10-year CAGRs north of 35%.

For those of you who are curious about where Berkshire (BRK.A) falls in the list – Berkshire Hathaway ranks No. 737 with a 10-year annualized return of 8.8%.

What about some of Berkshire’s largest holdings?

Wells Fargo: No. 914, 10-year annualized return of 7.454%.
Coca Cola (NYSE:KO): No. 740, 10-year annualized return of 8.746%.
American Express: No 1240, 10-year annualized return of just 5%.

Among the worst performing stocks of the last decades are a few easily recognizable names:

Fannie Mae (FNMA) and Freddie Mac (FMCC) – both suffered a negative 28% CAGR.
J.C. Penney (NYSE:JCP) – negative 23% CAGR.
American International Group (AIG) – negative 24.75%.
Sears holdings (SHLD) – negative 21.69%.

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get rich slowly?

“The people who have gotten rich quickly are also the ones who got poor quickly.” - John Templeton

A July 1974 Forbes article profiled Sir John Templeton and highlighted some of the wisdom he implemented in his investment process. The article touched on his discipline of consistently praying to God “for wisdom and clear thinking” at the start of each directors' meeting for the Templeton Growth Fund. Templeton noted that even with prayer they still “make hundreds of mistakes, but we don’t seem to make as many as others.”

In the article, Templeton also advised that “ninety-nine percent of investors shouldn’t try to get rich too quickly; it’s too risky.” He advised, “Try to get rich slowly.” Templeton is on nearly every short list showcasing the most successful investors of all time, and certainly held in high esteem among value and contrarian managers like us.

... With that as a given, we want to remind investors of our role in all of this: we are long-duration investors. Contrarian investors make money when they buy into temporary misery and sell into excitement or mania. The great financier and investor Bernard Baruch would have illustrated good investing as “buy[ing] straw hats in the winter.” We would add by saying that once purchased, investors should simply do their best to get out of the way and allow the fundamentals of those businesses to drive the results. In Berkshire Hathaway’s (NYSE:BRK.A) (NYSE:BRK.B) 1996 letter to shareholders, Warren Buffett (TradesPortfolio) advised:

“If you aren't willing to own a stock for 10 years, don't even think about owning it for 10 minutes. Put together a portfolio of companies whose aggregate earnings march upward over the years, and so also will the portfolio's market value."

At Smead Capital Management, we like to say that we are arbitrageurs of time. When the idea of having to wait becomes distasteful in the psyche of investors, they will greatly discount extraordinary – but perhaps mundane – businesses. We like to use those opportunities to acquire shares.

As contrarians who implement these tenets of investing, we own, in our view, a portfolio full of great businesses that lack current investor excitement. We operate on long-term ideas such as household formation, banking needs and the kind of sustained economic growth that paves the way for business and consumer spending to grow over time. We find attractive value in our banks, home-builders, media companies, health care and select retailers. We believe the economic needs our companies address will persist over time, and we want to be in front of the profitability and cash flow that can be gained in the process.

***

I wonder how good these Smead guys are?

I see they have a fund called Smead Value Fund.  Looking at the latest (2Q 2017) shareholder letter, SMVLX (the investor class shares) has returned 18.72%, 15.51%, 7.91% for 1 year, 5 years, inception (1/2/08).  The S&P 500 has returned 17.90%, 14.63%, 7.73%.  A very slight outperformance.  Which is actually good, because most funds underperform.

Looking at the website, their top ten holdings are AMGN, NVR, BRK.B, JPM, AXP, BAC, EBAY, PYPL, AFL, LEN.

I guess they're OK, but they're not really knocking it out of the park.

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Wednesday, July 12, 2017

two things

I read an article today about successful marriage. In it, the author says that if you want to have a successful marriage, you only need to do two things: 1) find a good person; 2) deserve a good person yourself by being one.

Somehow this message in marriage reminds me of Buffett and Munger. In order to have lifetime long rewarding relationships, we only need to do two things: 1) be a high quality friend ourselves and 2) find other high quality friends. To achieve great investment results, we also need to do two things: 1) find good companies and keep learning about them; 2) be patient and concentrate.

-- Grahamites

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Tuesday, July 04, 2017

indicators are high

The U.S. stock market remained significantly overvalued June 29, with Warren Buffett (Trades, Portfolio)’s market indicator reaching 133.2%. The high market valuation is partially driven by the deceleration of U.S. gross domestic product during the first quarter.

The Berkshire Hathaway Inc. (NYSE:BRK.A)(NYSE:BRK.B) CEO measures the total market valuation as the ratio of the Wilshire 5000 index to U.S. GDP. As of July 29, the index reached $25.35 trillion, approximately 133.2% of the last-reported GDP of $19.03 trillion. Based on the current market valuation, the U.S. stock market is expected to return -1.1% per year including dividends.

Since May, Robert Shiller’s cyclically-adjusted price-earnings ratio averaged 30, representing a new high since the 2008 financial crisis. The market Shiller P/E ratio is driven by significantly high ratios in the telecom, technology and real estate sectors, which are 29.8, 32.7 and 48.7 as of June 29. Based on the Shiller P/E valuation, the implied annual market return is about -2%.

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Tuesday, June 27, 2017

how to become part of the problem

Warren Buffett says people like him are the problem with the U.S. economy.

With a net worth of more than $75 billion, Buffett is currently the second richest man alive, according to Forbes. As the CEO of investing house Berkshire Hathaway, he is hallowed as the Oracle of Omaha. But for all his personal success, Buffett says the issue really is the 1 percent.

Part of the reason some are struggling, says the octogenarian investor, is that the automation and digitization of the U.S. labor force is happening faster than employees can be retrained.

"We always see shifts in employment. If you think about it, if you go back to 1800, it took 80 percent of the labor force to produce enough food for the country. Now it takes less than 3 percent. Well, the truth is that market systems move people around," says Buffett.

Buffett made his extreme wealth by investing in the stock market, an interest that took hold young. Buffett bought his first stock when he was 11 and has been in the market for 75 years. He recommends others do the same.

"They should just keep buying and buying and buying a little bit of America as they go along. And 30 or 40 years from now, they will have a lot of money," he says.

In an effort to compensate for the wealth inequality that he himself has benefited from, Buffett and his billionaire buddy Microsoft co-founder Bill Gates co-founded the Giving Pledge, a voluntary commitment by the richest people in the world to give away at least half of their wealth. The goal of the Giving Pledge is not only to help those in need but to encourage others to do the same.

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Friday, June 23, 2017

The Witch of Wall Street

[6/23/17] How Hetty Green acquired all that money

[6/7/06] So was Anne Scheiber.

[6/15/05] Hetty Green was a miser.

Tuesday, June 13, 2017

the only game in town?

The easiest way to understand why you don’t want to make money from the late stages of an expensive/futuristic stock boom is to look at what were considered the lowest-risk ways to play the 1990s boom. Microsoft (NASDAQ:MSFT), Intel (NASDAQ:INTC) and Cisco (NASDAQ:CSCO) were considered “pickaxe” companies to that boom because they were not dotcom flashes in the pan and were drafting on all the activity requiring their software, chips and routers created by the “internet revolution.”

Microsoft’s high stock price in 2000 was $58.38. It bottomed at $17.10 in early 2009. Today, Microsoft is projected to earn $3.02 in 2017 (Value Line). This means the stock sold in 2000 at 19 times 2017 earnings per share. Is it any wonder that investors have only seen 20% appreciation from the height of the Tech Bubble?

Intel and Cisco are even worse. Intel peaked at $66.75 in 2000, and it is projected to earn $2.80 in 2017 (Value Line), which means it traded at 23.8 times 2017 earnings back then. Cisco traded at $77.31 per share at its 2000 peak and bottomed two years later at $10.49. It was projected to earn $2.40 per share (Value Line). It traded for 32 times what it would earn 17 years later. This only happens when you are “the only game in town!”

Are we doing something very similar today? Here are the P/E ratios of the FANG stocks, Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN), Netflix (NASDAQ:NFLX) and Alphabet (NASDAQ:GOOGL), based on Value Line estimates:
  • Facebook – $4.75 in 2017, P/E ratio 32.
  • Amazon – $7.95 in 2017, P/E ratio 125.
  • Netflix – $1.10 in 2017, P/E ratio 148.
  • Alphabet – $35.00 in 2017, P/E ratio 29.
A quick glance at these numbers shows that Amazon and Netflix are certainly as expensive as Cisco and other glamour large cap stocks were in 1999. Facebook and Alphabet are less expensive – or like what Microsoft, IBM and Hewlett Packard were in 1999. Therefore, as we consider how this might play out, we will ask how the FANG stocks became “the only game in town.” FANG dominance is best represented by their gains since the beginning of 2015 as compared to the gains in the remaining stocks in the Standard & Poor's 500 Index. The chart below shows that the FANG stocks gained 48.92% while the remaining stocks gained 4.96% on an equally weighted basis (1):

...

We have no idea when this euphoria episode will end. However, we believe we know what to do with it. When a group of stocks gets mega-popular, we must avoid the area the same way we would avoid Palm Beach during a Miami hurricane alert. This is especially true when it is “the only game in town.”

-- Smead Capital Management

***

[P.S. I personally own every stock mentioned above -- in varying degrees, with no immediate plans to sell.]

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Friday, June 09, 2017

patience

"The big money is not in the buying and selling … but in the waiting"   Charlie Munger

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Tuesday, June 06, 2017

I predict...

Making bold predictions is a fool’s errand. I think Yogi Berra summed it up best when he spoke about the challenges of making predictions:

“It’s tough to make predictions, especially about the future.”

While making predictions might seem like a pleasurable endeavor, the reality is nobody has been able to consistently predict the future (remember the 2012 Mayan Doomsday?), besides perhaps palm readers and Nostradamus. The typical observed pattern consists of a group of well-known forecasters bunched in a herd coupled with a few extreme outliers who try to make a big splash and draw attention to themselves. Due to the law of large numbers, a few of these extreme outlier forecasters eventually strike gold and become Wall Street darlings…until their next forecasts fail miserably.

Like a broken clock, these radical forecasters can be right twice per day but are wrong most of the time. Here are a few examples:

Peter Schiff: The former stockbroker and President of Euro Pacific Capital has been peddling doom for decades (see Emperor Schiff Has No Clothes). You can get a sense of his impartial perspective via Schiff’s reading list (The Real Crash: America’s Coming Bankruptcy, Financial Armageddon, Conquer the Crash, Crash Proof – America’s Great Depression, The Biggest Con: How the Government is Fleecing You, Manias Panics and Crashes, Meltdown, Greenspan’s Bubbles, The Dollar Crisis, America’s Bubble Economy, and other doom-instilled titles.

Meredith Whitney: She made an incredible bearish call on Citigroup Inc. (C) during the fall of 2007, alongside her accurate call of Citi’s dividend suspension. Unfortunately, her subsequent bearish calls on the municipal market and the stock market were completely wrong (see also Meredith Whitney’s Cloudy Crystal Ball).

John Mauldin: This former print shop professional turned perma-bear investment strategist has built a living incorrectly calling for a stock market crash. Like perma-bears before him, he will eventually be right when the next recession hits, but unfortunately, the massive appreciation will have been missed. Any eventual temporary setback will likely pale in comparison to the lost gains from being out of the market. I profiled the false forecaster in my article, The Man Who Cries Bear.

Nouriel Roubini: This renowned New York University economist and professor is better known as “Dr. Doom” and as one of the people who predicted the housing bubble and 2008-2009 financial crisis. Like most of the perma-bears who preceded him, Dr. Doom remained too doom-ful as the stock market more than tripled from the 2009 lows (see also Pinning Down Roubini).

Rather than paying attention to crazy predictions by academics, economists, and strategists who in many cases have never invested a penny of outside investor money, ordinary investors would be better served by listening to steely investment veterans or proven prediction practitioners like Billy Beane (minority owner of the Oakland Athletics and subject of Michael Lewis’s book, Moneyball), who stated the following:

“The crime is not being unable to predict something. The crime is thinking that you are able to predict something.”

-- Wade Slome, CFA, CFP

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Sunday, May 28, 2017

10 stocks to last the decade

In August 2000, Fortune ran an article titled “10 Stocks to Last the Decade.” The author’s intention was clear, as captured in a short description preceding the article: “A few major trends will likely shape the next 10 years. Here's a buy-and-forget portfolio to capitalize on them.”

Well, we have more than 15 years behind us. Let’s look back and see how the picks held up over time. Let’s also see if we can spot any trends that should have caught the reader’s eye.

***

The 10 stocks are Nokia, Nortel, Enron, Oracle, Broadcom, Viacom, Unvision, Charles Schwab, Morgan Stanley, Genentech.

Here's the conclusion of the article:

After 15 years, here’s the final result: a handful of winners, a handful of laggards and some serious disasters. You lost most – if not all – of your investment on half of the positions. By comparison, the S&P 500 has increased by ~65% (cumulative) since the article was written.

What’s most interesting to me is what we can learn from the losers: Without fail, these were the companies that were part of the “sweeping trends that have the potential to transform the economy.” They had grown like crazy in recent years; analysts and investors expected the good times to continue in perpetuity. Their valuations required perfection – and in some cases, even more. The author stepped to the plate in search of riches. In reaching for home runs, investors ended up with a number of devastating strikeouts. The subsequent experience of investors in these 10 companies – especially those with the potential to transform the economy and the world as we know it – offers an important lesson that shouldn’t be forgotten.

[see also Ten Stocks for the Next Ten Years]

***

What about my top 10?  Well, I didn't have exactly have a top 10, but I had a 20 Punch Portfolio that I wrote up in August 2004.  I wonder how they have done since.  That's about 13 years ago, but for convenience, I'll just use Morningstar's 10 and 15 year returns.  For comparison, the S&P 500 has returned 7.06% and 7.67%.

1.  BRK.B  8.51%   8.18%
2.  WSC    bought out by Berkshire Hathaway
3.  MKL    7.07%  10.86%
4.  DHR   11.60%  12.80%
5.  WMT    7.16%   3.75%
6.  COST  13.95%  11.88%
7.  KSS   -4.12%  -3.03%
8.  BBBY  -1.39%   0.04%
9.  ORLY  21.10%  20.04%
10. HD    16.05%   9.58%
11. LOW   10.57%   9.05%
12. FAST   9.29%  11.52%
13. EBAY   8.32%  11.43%
14. RPM   10.85%   9.58%
15. CSL    9.71%  12.40%
16. ACS   bought out by Xerox (-8.27%, -0.96%)
17. DELL  went private
18. APPB  went private
19. EAT    3.97%   5.17%
20. JNJ    9.13%   6.47%

I still own 15 out of the 20.  Gone are WSC, CSL, ACS, DELL, APPB.  The only one I actually sold was CSL (mistake).  Out of those 15, 10 have outperformed the S&P for 15 years.

What about my other top holdings?  Let's see, stocks not listed above that are currently in my top 20 are MSFT, AAPL, UNH, ROST, CSCO, WBA, ORCL, AMZN, PG, PYPL, CHKP, INTC, BABA.   (The Punch stocks that are in my current top 20 are BRK.B (and A), MKL, COST, ORLY, HD, LOW, JNJ.  And I guess you could sort of count EBAY since it split up into EBAY and PYPL.  DHR would be there too, but it spun off FTV.)  How have they done?

MSFT   9.97%  7.89%
AAPL  25.97% 35.13% (sheesh)
UNH   13.12% 15.29%
ROST  23.24% 18.54%
CSCO   3.44%  5.27%
WBA    7.26%  6.06%
ORCL   9.73% 12.04%
AMZN  30.68% 29.99% (another sheesh)
PG     5.64%  6.40%
PYPL    N/A    N/A
CHKP  16.91% 12.91%
INTC   7.15%  3.12%
GOOGL 12.40%   N/A
BABA    N/A    N/A

Out of the 11 stocks above that have a track record, 7 have beaten the S&P 500.  Out of the top 10 stocks in my portfolio (BRK, MSFT, AAPL, UNH, JNJ, HD, ROST, CSCO, MKL, LOW), 2 have underperformed the market (JNJ and CSCO).  I don't have any plans to sell out any of my top 20 stocks, though I might trim here and there.  Of those remaining on my 20 Punch list, KSS is the shakiest.

(Alphabet would replace BABA in my top 20, if you combine the A and C shares.  So I revised the list above.)

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Friday, May 19, 2017

the stock market and Watergate

Stocks are enduring their worst stretch of 2017 as Washington is in the grips of yet another scandal that requires a special prosecutor.

The Dow Jones industrial average tanked more than 370 points Wednesday on news reports that President Trump allegedly asked now-former FBI director James Comey to end the bureau’s investigation into former National Security Adviser Michael Flynn and his possible ties to Russian influence.

Those reports - and Trump’s firing of Comey last week - sparked an immediate debate about whether the president may have obstructed justice as the FBI investigates whether Russia tried to interfere with the U.S. presidential elections.

The Justice Department has now appointed former FBI Director Robert Mueller as a special prosecutor to investigate whether there was any coordination between Russian officials and Trump campaign associates to interfere in the 2016 elections.

For investors, there are two immediate fears: At the very least, this scandal is sucking all the oxygen out of Washington, making it that much harder for the Trump administration to push its agenda for cutting taxes and stimulating growth through infrastructure spending.

The "markets had risen on the expectation of tax and health reform along with an infrastructure spending plan, but the constant string of high profile distractions involving the president or members of his administration has put all that into jeopardy," said Tom Siomades, head of the Investment Consulting Group of Hartford Funds.

What’s more, many "worry that the market will react negatively to the firing of FBI Director Comey, as it did following President Nixon’s firing of Archibald Cox, the Watergate special prosecutor, in October 1973," notes Sam Stovall, chief investment strategist for CFRA.

"Investors are now concerned that President Trump will be impeached and are looking warily at historical precedent," Stovall noted.

What does that history show?

Constitutional crises are never good for the stock market. During the Watergate scandal, when Cox was fired and then-Attorney General Elliot Richardson resigned in protest - the S&P 500 fell 14% from October 1st through November.

But investors shouldn’t jump to conclusions. Nixon’s so-called Saturday Night Massacre took place while Wall Street was already mired in one of the worst bear markets in history. From January 1973 through August 1974 - a period that includes the conviction of the Watergate burglars, Nixon’s resignation, global oil shock, Middle East turmoil, and a dramatic spike in inflation - stocks lost 42% of their value.

"[T]he 1973-to-1974 slump seemed endless," Jason Zweig wrote in Money in 1997. "[I]n a crescendo of calamity, war broke out in the Mideast, oil prices quadrupled, Richard Nixon resigned over the Watergate scandal, and inflation hit an annual rate of 12.2%."

Today, Wall Street is in the midst of one of the second-longest bull markets ever. Inflation continues to be muted, and oil prices seem to have stabilized.

This doesn’t mean that the stock market is out of the woods just yet.

The S&P 500 fell nearly 20% in the weeks leading up to special prosecutor Kenneth Starr’s report on President Clinton, which ultimately resulted in Clinton’s impeachment. And that was in the late 1990s, when the stock market and economy were booming.

"However, after investors concluded that this event would not likely lead to recession, the [market] then went on to recover the entire decline and set a new all-time high" at the end of November, says Stovall, months before the Senate acquitted Clinton in February.

"This time around, while the current crisis may trigger a correction, we do not think it will lead to recession and therefore will not result in a new bear market."

Still, that means a correction - defined as a loss of 10% to 20% of the stock market’s value - could be lurking around the corner, depending on what the special prosecutor finds.

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Wednesday, May 10, 2017

Chuck Carnavale's investment lesson

The theme of this article is to share what I consider to be the most important stock investment lesson I ever learned. This important lesson is supported by virtually every master investor I have learned to respect and admire. This lesson was also emphatically taught to me in the school of hard knocks, but my motivation to write this is born from the realization that very few “investors” are able to implement this lesson in real-world situations.

From a broad or general perspective, this investment lesson is simply to apply the discipline to only take investment advice from credible sources. Unfortunately, it has been my experience that most investors are keen to get their investment advice from pathological liars. Obviously, pathological liars are not a reliable source.

More specifically, this important investment lesson is: do not base investment decisions on stocks based on short-term price volatility. Truly aware investors recognize and accept the reality that stock price movements can be, and often are, irrational in the short run.

The key is to think and act like a business owner when you purchase a stock. When people invest in or start a new business, they are not thinking about selling in the next day, month or even year. Instead, they are thinking about owning and running the businesses for years to come. Of course, if the businesses are privately held, there is also the benefit that no one is continuously shoving purchase quotes in their faces either.

It’s critical to understand and remember that short-term price volatility is not always rational and certainly not always fundamentally based. Instead, short-term price volatility is more often than not emotionally charged. Consequently, a rising stock price is not always indicative of a good company, but sometimes it can be. Conversely, a falling stock price is not always indicative of a bad company, but sometimes it can be.
The secret is to have a realistic assessment of the true value of the business you own, and make your buy, sell or hold decisions accordingly. The primary point is to focus your attention on how you think the business will perform going forward.

In the long run, stock price will inevitably relate to business results. In the short run, fear or greed can drive the price up or down unjustifiably. And most importantly, short-term price aberrations are totally unpredictable. Therefore, you cannot, and I argue should not, place too much importance on them.

In the long run, stock prices will correlate very closely to the success of the business behind the stock. Therefore, if you are a prudent long-term oriented investor, it only makes sense to focus more on business results (fundamentals) than it does short-term price action. The reason I consider this the most important stock lesson I ever learned is because it allows me to make rational decisions in the face of emotionally charged periods of time.

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Wednesday, April 26, 2017

Seth Klarman on buying

Position sizing is another important part of portfolio management. Different stocks can command different percentages of your investment portfolio, depending on conviction. Klarman believes one of the best strategies to build a position, as well as an understanding of the business you are investing in, is to build a new position gradually:

“The single most crucial factor in trading is developing the appropriate reaction to price fluctuations…One half of trading involves learning how to buy. In my view, investors should usually refrain from purchasing a 'full position' (the maximum dollar commitment they intend to make) in a given security all at once…Buying a partial position leaves reserves that permit investors to 'average down,' lowering their average cost per share, if prices decline…If the security you are considering is truly a good investment, not a speculation, you would certainly want to own more at lower prices. If, prior to purchase, you realize that you are unwilling to average down, then you probably should not make the purchase in the first place.”

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Sunday, April 23, 2017

temperament edge

Temperament edge and time horizon edge are mostly commonly cited moats in the value investing world. I agree both are advantageous, but it becomes more and more clear to me they are not very advantageous, maybe just a little bit advantageous.

I am not saying temperament is not important. In fact, I think it is a prerequisite to be a great value investor. But temperament is genetic and we know that somewhere between 1% to 3% of the population is wired to have that genetic temperament advantage. It is genetic, but also at the same time generic – everybody born with the temperament edge have similar temperaments and most genuine value investors have it. If you have the right temperament, you can outperform the market by 1% to 2% a year just like if you buy a basket of low price-earnings (P/E), low price-book (P/B) stocks you can outperform the market by 1% to 2% a year statistically speaking, but no more than 2%. I do not think outsized returns can be generated just because one has this temperament edge, except in extreme cases.

Temperament edge has a few dimensions:

Contrarian
Patience
Concentration
Rationality
Calmness

Most people with the temperament edge can check two or three boxes out of the five, but very few check all of them. For instance, many value investors recognized that Bank of America (NYSE:BAC) and Wells Fargo (NYSE:WFC) were undervalued a few years back, but only a few acted on it and very few concentrated their investments on them like Munger did.

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Sunday, April 02, 2017

How overvalued are stocks?

The bull market entered a new phase last year when it broke solidly above S&P 2,100 and bounced off that level after the election. The subsequent 10%+ rally is justified by accelerating economic and earnings growth, with Q1 expected to hit a 9% EPS advance, the highest since Q4 of 2011.

But with the trailing P/E multiple hitting nearly 22 times -- S&P 2350 / $108 EPS for 2016 = 21.75 -- many investors are looking for the end of the bull market based on valuation alone.

Given this pricey picture, it's a very good time to take a step back and get a read on just how over-valued the market might be.

Historically Speaking 

We all know about the great Nasdaq Tech Bubble of 1999. Just how far away from a fair value P/E of 15X were big cap stocks then? 

While the Nasdaq P/E was much higher, at the end of 1999 the S&P 500 flashed a trailing 12-month P/E multiple of over 29X. It had peaked even higher near 31X in July of that year. 

And for broader context, the last six bull market tops all saw the S&P 500 trailing P/E ratio hit an average peak of 30X earnings. I doubt we get that high again after the lessons learned in the two bear markets of the previous decade, but it's certainly still possible. 

Bottom line: Historically speaking, we aren't even close to a bubbly valuation peak that would have me concerned about the end of the bull market. Especially with 2-3% GDP growth, attractive interest rates, and the return of nearly 10% earnings growth.

-- Kevin Cook, Weekend Wisdom

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Monday, March 13, 2017

get-rich books

in a sentence, each.  (plus a bonus quote)

 "Think and Grow Rich" by Napoleon Hill
Originally published: 1937

Mastering your money has more to do with mindset and overcoming psychological barriers than anything else. At the end of the day, you can think your way to success.

"Riches begin in the form of thought! The amount is limited only by the person in whose mind the thought is put into motion."


"The Intelligent Investor" by Benjamin Graham
Originally published: 1949

"Value investing" — buying stocks when they are undervalued and holding them for a long period of time — is the most effective way to put your money to work . . . and a hallmark of Warren Buffett's investment strategy.

"But investing isn't about beating others at their game. It's about controlling yourself at your own game."


"The Richest Man in Babylon" by George S. Clason
Originally published: 1926

You probably won't get rich quick, but you'll get rich if you pay yourself first, put that money to work and stick to long-term thinking.

"I found the road to wealth when I decided that a part of all I earned was mine to keep. And so will you."


"Rich Dad Poor Dad" by Robert Kiyosaki
Originally published: 1997

Knowing the difference between an asset — something that puts money in your pocket — and a liability — something that takes money out of your pocket — is the most important distinction to recognize if you want to get rich.

"The long-term rich build their asset column first. Then the income generated from the asset column buys their luxuries. The poor and middle class buy luxuries with their own sweat, blood, and children's inheritance."


"The Little Book of Common Sense Investing" by John C. Bogle
Originally published: 2007

The simplest and most efficient investment strategy is to invest in low-cost index funds.

"Investing is all about common sense. Owning a diversified portfolio of stocks and holding it for the long term is a winner's game."


 "Rich Habits" by Thomas Corley
Originally published: 2010

What you do every day matters, so if you want to build wealth, start by reevaluating your daily habits.

"The metaphor I like is the avalanche. These habits are like snowflakes — they build up, and then you have an avalanche of success."

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