Thursday, May 17, 2018

Schwab Choiceology

Choiceology with Dan Heath

What happens when intuition fails us? Listen in as Dan Heath shares stories of irrational decision making—from historical blunders to the kinds of everyday errors that could affect your future.

Choiceology, an original podcast from Charles Schwab, explores the lessons of behavioral economics, exposing the psychological traps that lead to expensive mistakes.

Episode 1

We can’t all be above average. So why, in certain situations, do we think we’re so special?

Episode 2

It's not always about life-changing decisions—sometimes small changes can make a big impact.

Episode 3

Imagine that you’ve put in effort toward a goal, but things haven’t quite worked out the way you hoped. How do you know when it’s time to let it go?

Episode 4

In a world awash in data, you’d think it would be relatively easy to make informed, objective decisions. But not if you only see what you want to see.

Episode 5

News reports sometimes make it seem as if danger lurks around every corner. And while there’s no doubt that risk is a part of life, do we worry more than we should?

Episode 6

Focusing on a single data point to the exclusion of other information: It’s a tried-and-true negotiating strategy, and it can quickly skew your judgment.

Episode 7

Whether expecting joy or despair, we tend to overestimate the long-term emotional impact of life events.

Thursday, February 15, 2018

a V bottom?

technician Urban Carmel of The Fat Pitch blog recently undertook a study of 10% drops in the S&P back to 1980.  (In order to capture more cases, he didn't draw the line precisely at 10%, but stayed close to that mark.)

In all, there were 25 instances of an approximately 10% decline in the index.  Of these, only 16% resulted in a V-bounce where the original low for the move was never revisited.

In the other 84% of the situations, the market returned to test its lows.  So the odds are strong, on the historical record at least, that the S&P will creep back to the area of its February 8 closing low (2581) before the market can resume its climb to new all-time highs.

-- Richard Band, 2/15/18

Friday, February 09, 2018

bull and bear markets

Take the long view.

Markets typically go up and down, and you’re likely to experience several significant declines during a long investing career. But even bear markets—that is, periods when the market fell by more than 20%—historically have been relatively short.

The Schwab Center for Financial Research looked at both bull and bear markets, based on the S&P 500 Index, going back to 1966, and found that the average bear market lasted a little longer than a year (505 days). The longest of the bears was roughly two and a half years (915 days), and it was followed by a nearly five-year bull run.

Timing the market’s ups and downs is nearly impossible, but all investors would do well to ignore the noise and stay focused on their plans.

Friday, January 19, 2018

Gates to pay Nigeria's debt

Billionaire philanthropists Bill and Melinda Gates will pay off $76 million of Nigeria's debt.

It's part of a promise the Bill & Melinda Gates Foundation made to the African country in an effort to end polio. The payments, which will be made over the course of 20 years, are due to begin this year.

In 2014, Nigeria borrowed the money from Japan to fund its fight against the preventable disease, Quartz reports. The Gates Foundation had agreed to repay the loan if Nigeria met certain conditions, namely "achieving more than 80% vaccination coverage in at least one round each year in very high risk areas across 80% of the country's local government areas," according to an email from the foundation to Quartz.

Nigeria held up its end of the bargain, and no new cases of polio were reported in the country in 2017. That's a drastic change from 2012, when Nigeria had over half of all polio cases worldwide, according to Quartz.

In a recent blog post, Gates acknowledges the significant strides made towards wiping out the disease globally — 30 years ago, there were 350,000 cases of polio per year worldwide, while last year, that number dropped to just 21.

"The heroes who have made this progress possible are the millions of vaccinators who have gone door to door to immunize more than 2.5 billion children. Thanks to their work, 16 million people who would have been paralyzed are walking today," Gates writes.

Polio is "a crippling and potentially deadly infectious disease," which, after invading the nervous system, can cause paralysis. Among those paralyzed, two to 10 percent die.

The Gates Foundation spent $3 billion in 2017 to help stop the spread of the disease, and names polio eradication one of its "top priorities." The foundation says it has supported the Global Polio Eradication Initiative's efforts to wipe out the disease by contributing technical and financial resources to accelerate targeted vaccination campaigns, community mobilization and routine immunizations.

The Gates' donation is not out of character; in 2017, they gave $4.6 billion to their namesake organization. In addition to its work with polio, the foundation has also spent $1 billion in an effort to send over 20,000 kids to college and has committed millions more toward fighting Alzheimer's and providing resources to women in developing countries.

Thanks in part to his massive philanthropic efforts, Gates is no longer the richest person in the world, a title that he had held for much of the last decade. Jeff Bezos is currently the richest person, with a net worth of more than $108 billion, according to Forbes. Gates is currently worth $92 billion.

However, Bloomberg notes that Gates would have a net worth of $150 billion if he had not been so generous. While Bezos is not know for being particularly philanthropic as billionaires go, in January he announced a $33 million donation toward TheDream.Us, an organization that provides scholarships undocumented immigrants brought to the U.S. as children, known as "dreamers."

Gates also founded The Giving Pledge with Warren Buffett. Its billionaire signers have promised to give away at least half of their wealth.

"We have been blessed with good fortune beyond our wildest expectations, and we are profoundly grateful," Bill and Melinda wrote in their Giving Pledge letter, CNBC Make It previously reported. "But just as these gifts are great, so we feel a great responsibility to use them well."

Sunday, January 14, 2018

stock returns in the next 10 years

As 2017 dawned, few market experts had high hopes for stocks' returns over the next seven to 10 years; after all, the market had already staged a strong run stretching back to March 2009.

With stocks posting another stellar year last year--and with valuations that could hardly be described as cheap--most serious experts are even more circumspect in their long-range return expectations today.

True, economic fundamentals are fine: The economy is solid, unemployment remains low, and corporate earnings growth has been robust. But much of that good news is arguably already priced into stocks' valuations today.

At first blush, forecasting the market's returns, even on a long-term basis, might seem like folly. It's impossible to predict the future, right? But like it or not, market-return assumptions are an essential input for your financial plan. Without some reasonable expectation of what your portfolio will return, you can't know how much you'll need to save and for how long. You can't know whether saving for retirement should be your sole financial preoccupation or whether you can hit other goals, such as college funding, along the way.

To help you arrive at an educated guess of how much the market will contribute to the success of your plans, I've gathered return expectations from market experts both inside and outside of Morningstar. Note that the specifics of these return estimates vary a bit; some of these return expectations are inflation-adjusted while others are not. In addition, some of the experts cited below forecast returns for the next decade, while others employ slightly shorter time horizons. In any case, these return estimates are more intermediate-term than they are long. As such, they're the most relevant to investors whose time horizons are in that ballpark, or to new retirees who face sequence-of-return risk in the next decade.

John C. Bogle, founder of Vanguard Group
Highlights: 4% returns for stocks, 3% returns for bonds over the next decade (October 2017)

Highlights: -4.4% real (inflation-adjusted) returns for U.S. large caps over the next seven years; 2% real returns for emerging markets equities (October 2017).

Morningstar Investment Management
Highlights: 1.8% 10-year nominal returns for U.S. stocks; 2.5% 10-year nominal returns for U.S. bonds (Sept. 30, 2017).

Research AffiliatesHighlights: 0.3% real returns for U.S. large caps during the next 10 years; 0.8% real returns for the Barclays U.S. Aggregate Bond Index (Dec. 31, 2017).

Charles Schwab Investment AdvisoryHighlights: 6.7% expected nominal return from U.S. large-cap stocks from 2017-2026; 3.1% nominal returns from U.S. investment-grade bonds (August 2017)

Highlights: Nominal U.S. equity-market returns in the 3% to 5% range during the next decade; 5.5% to 7.5% returns for non-U.S. equities; 2% to 3% expected returns for global fixed-income markets (December 2017)

Tuesday, January 09, 2018

Bezos no. 2 / make that no. 1

[1/9/18] Bezos made $6.1 billion in five trading days in 2018.  Now worth more than Bill Gates was ever worth.

[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 Inc. rose $18.32 on Wednesday, the day after the e-commerce giant said it plans to buy Dubai-based online retailer 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.

Thursday, December 28, 2017

yeah, the market was up but...

As 2017 winds down and 2018 gets ready to begin, now is the perfect time to reflect on how you did this year and how you can improve upon that next year. Even though the market kept going up and up, not all stocks went along for the ride. There were plenty of stocks that underperformed the market. In fact, more than half of the stocks in the S&P underperformed this year. And nearly 25% actually went down and lost money! Hard to believe in such a spectacular year. But it's true.

-- Kevin Matras, Profit from the Pros

Thursday, December 21, 2017

market most overbought in 22 years

It's proved to be a major market theme this year: Stocks are hitting all-time high after all-time high in what appears to be an unstoppable juggernaut of an equity rally. Many say that's cause for concern, as the broader market has seen so few pullbacks this year amid virtually no volatility.

According to one analysis, however, the market's historically overbought condition is no reason to press the sell button.

The S&P 500 is the most overbought in 22 years, as measured by its 14-week relative strength index, said Ryan Detrick, senior market strategist with LPL Financial. The classic overbought/oversold indicator is historically elevated, above 80.

But Detrick found that when the S&P 500 has become this overbought (in 13 times since 1950), the market has risen the following year all but once, seeing an average annual move higher of 11 percent.

"In other words, really strong returns going forward, even after we are so overbought, which is one of those rare times that maybe this could be a continuation of the bull market. Things still look pretty good, even though we are still historically overbought here," Detrick said Wednesday in an interview with CNBC's "Trading Nation."

This is just another stunning statistic to pile into a record year for records. This year has also produced the longest daily streak ever without a 3 percent pullback, and the most all-time high records for the Dow Jones industrial average.

Monday, December 18, 2017


[from Liz Ann Sonders]

There are myriad metrics which can be used to value stocks individually; or the market overall.  It’s admittedly difficult to decide which valuation metrics are the most relevant at any point in time.  I keep a running tab of 13 of them—some of which are quite common, and others likely less well-known.  As you can see in the table below, I’ve arrayed them in descending order, from those which declare the market to be inexpensive to those which declare the market to be extremely over-valued.  The metrics at the top are interest rate- and/or inflation-based; and given today’s still-easy financial conditions, stocks still look fairly reasonably-priced.

But I want to call out one metric in particular—the S&P 500 dividend yield.  I was fooling around with a number of charts and data points last week, and had my research assistant put together a simple chart comparing the 2-year U.S. Treasury yield to the S&P 500’s dividend yield, as you can see below.  Just last week, the former moved above the latter for the first time in about a decade.

My friend Jason Trennert at Strategas Research Partners wrote about this indirectly last week in a research post.  He’s been calling the environment in which we’ve been investing since the financial crisis “TINA” (there is no alternative).  What’s meant by that acronym is that investors have been forced out the risk spectrum and into equities due to the paltry yields offered on safer fixed income securities.  Last week, Jason added an “A” to TINA; because “there is now an alternative” (TINAA), with even shorter-term government debt now yielding more than stocks.

Friday, November 24, 2017

2017 Predictions

We all like to remember our successes and forget our failures, and finance is no different. As investors’ inboxes once again become clogged with annual outlooks from Wall Street’s scribblers, there is little admission of the nearly universal failure to predict what happened this year—even though the things the analysts missed are much more interesting than their forecasts.

There are two big lessons to learn from the mistakes of the year-end crystal-ball gazing. The first is that when everyone agrees that prices can only go in one direction, it is dangerous. The second is more nuanced: We really know an awful lot less about how the economy works than we thought.

Last year almost everyone was bullish about the prospects for the “reflation trade” of higher bond yields, stock prices and the dollar, driven by rising wages and Donald Trump’s tax-cut plans.

A year on and inflation hasn’t materialized, the tax discussion is bogged down in Congress, and almost every analyst was wrong. Benchmark 10-year Treasury yields are down, not up, the dollar is down, not up, and the S&P 500 has delivered more than double the gains of even the most bullish Wall Street prognosticators.

Cynics will look at what happened in the past and wonder why anyone bothers. Predictions have a dire track record, and have been sadly predictable themselves. Treasury yields have been forecast to rise every year for the past decade, according to forecasts collected by Consensus Economics, yet they have gone down more often than not. Even when they went up, the moves were only once anywhere near what was predicted, back in 2009. Forget using a dartboard to plan investments; on average a coin toss would be better.

The same goes for stock prices. Only rarely is the average S&P 500 forecast of strategists anywhere near the actual result. More than half the time since 2000 the miss has been either too high or too low by an amount bigger than the S&P’s 9% long-run annual gain.

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.

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.

[5/18/18 - Looking back at my log on 2/13/17 -- To change the sweep account, go to positions, and click on the current sweep vehicle.  From there you're presented a button to "Change Core Position."  If only it was this easy at the other brokerages.]

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.

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.


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.

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

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.

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.”

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.

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.

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.]

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 it is time for a new adventure. Gladly that adventure continues with Zacks...just in a new and exciting capacity. 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 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.


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.

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.

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.

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.

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%.

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.

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

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%.

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.

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.]

Friday, June 09, 2017


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

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

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.)