Find a Life Partner Who Agrees on Money Matters
Marriages nowadays face a lot of obstacles. According to a recent study, spouses who feel their partner spends money foolishly have a 45% higher than average divorce rate. After extramarital affairs and alcohol/drug abuse, financial disputes are the third most common risk factor in marriages that break up.
Get to know your fiancé’s thoughts on money before you say “I do.” If you don’t like what you discover, say “I don’t.” During our courtship, Enid struck me as the thriftiest person I had ever met (next to my old buddy Smokey Johnson, who always ordered a 10-cent Fishwich at McDonald’s). From the start, I knew that marrying her was like collecting an extra dividend check every day of my life. We’ve never argued about how much to spend, only how little!
-- Richard Band in the May 2010 Profitable Investing
Monday, April 26, 2010
Friday, April 23, 2010
profitable bank bailouts
Bank bailouts are turning out to be great business for the government. Unfortunately for taxpayers, other federal rescues will almost certainly wind up in the red.
The Treasury Department said Monday it will begin selling its stake in Citigroup at a potential profit of about $7.5 billion -- not a bad haul for an 18-month investment.
The move is a major step in the government's effort to unravel investments it made in banks under the $700-billion Troubled Asset Relief Program at the height of the financial crisis.
Yet a year and a half after Congress passed the big bailout, other parts of it — particularly troubled automakers General Motors and Chrysler and insurer American International Group — show no signs of being profitable.
Despite the returns from Citi and other banks, analysts and even the Treasury Department predict the bailout will wind up costing taxpayers at least $100 billion. The bailouts of mortgage giants Fannie Mae and Freddie Mac, which were not included in TARP, will add billions more.
But the money the government makes off banks helps offset the damage. With the sale of the Citi shares, the eight major banks that got bailout money funds will have repaid the government in full. Those investments have netted the government $15.4 billion from dividends, interest and the sale of bank stock warrants, which gave the government the right to buy stock in the future at a fixed price.
Based on Monday's share price, selling its 27% stake in Citi would add about $7.5 billion in profits. The stock fell 3% to $4.18 a share Monday after news of the planned Treasury sales. But that still puts it well above the $3.25 a share the government paid.
The Treasury Department said Monday it will begin selling its stake in Citigroup at a potential profit of about $7.5 billion -- not a bad haul for an 18-month investment.
The move is a major step in the government's effort to unravel investments it made in banks under the $700-billion Troubled Asset Relief Program at the height of the financial crisis.
Yet a year and a half after Congress passed the big bailout, other parts of it — particularly troubled automakers General Motors and Chrysler and insurer American International Group — show no signs of being profitable.
Despite the returns from Citi and other banks, analysts and even the Treasury Department predict the bailout will wind up costing taxpayers at least $100 billion. The bailouts of mortgage giants Fannie Mae and Freddie Mac, which were not included in TARP, will add billions more.
But the money the government makes off banks helps offset the damage. With the sale of the Citi shares, the eight major banks that got bailout money funds will have repaid the government in full. Those investments have netted the government $15.4 billion from dividends, interest and the sale of bank stock warrants, which gave the government the right to buy stock in the future at a fixed price.
Based on Monday's share price, selling its 27% stake in Citi would add about $7.5 billion in profits. The stock fell 3% to $4.18 a share Monday after news of the planned Treasury sales. But that still puts it well above the $3.25 a share the government paid.
Thursday, April 22, 2010
buy signal
If the trend is your friend, as the Wall Street cliché goes, then the stock market has been an incredibly friendly place of late.
What I have in mind is a rare buy signal that was generated a couple of weeks ago by a trend-following indicator with a good long-term record. Prior to the recent buy signal, there had been only 12 of them since 1967.
And two of those 12 prior buy signals occurred in the last 12 months alone. In other words, between 1967 and March 2009, this indicator gave just 10 buy signals -- an average of just one every 4.3 years. Since March 2009, in contrast, they have averaged once every four months or so.
The indicator in question comes from Ned Davis Research, the quantitative research firm. It generates a buy signal whenever the percentage of common stocks trading above their 50-day moving averages rises above 90%. Davis refers to such events as a "breadth thrust."
The recent buy signal, according to this indicator, occurred on April 5. The other buy signals over the last year occurred on May 4 and Sep. 16 of last year.
What I have in mind is a rare buy signal that was generated a couple of weeks ago by a trend-following indicator with a good long-term record. Prior to the recent buy signal, there had been only 12 of them since 1967.
And two of those 12 prior buy signals occurred in the last 12 months alone. In other words, between 1967 and March 2009, this indicator gave just 10 buy signals -- an average of just one every 4.3 years. Since March 2009, in contrast, they have averaged once every four months or so.
The indicator in question comes from Ned Davis Research, the quantitative research firm. It generates a buy signal whenever the percentage of common stocks trading above their 50-day moving averages rises above 90%. Davis refers to such events as a "breadth thrust."
The recent buy signal, according to this indicator, occurred on April 5. The other buy signals over the last year occurred on May 4 and Sep. 16 of last year.
How has the stock market performed following past buy signals? Quite well, according to Davis' calculations
| Period after buy signal | Average return of S&P 500 | Worst experience | Best experience |
| Next month | 4.6% | 1.1% | 11.1% |
| Next quarter | 8.2% | 0.4% | 13.7% |
| Next 6 months | 13.1% | 4.9% | 24.3% |
| Next year | 19.7% | 11.6% | 33.9% |
It's worth noting, furthermore, that unlike many other trend-following indicators that have been biased upwards in recent years by the increasing number of interest-rate sensitive issues, Davis' calculations are based on a subset of stocks that eliminates closed-end funds, bond funds, exchange-traded funds, and the like.
Does this indicator mean you should throw caution to the winds? Of course not. As Davis points out to his clients, "one should never say 'never' regarding the stock market."
[via playtennis @ chucks_angels]Sunday, April 18, 2010
value traps
To be a great investor, you need to not only invest in great opportunities, but also avoid terrible ones. Here are some value traps you need to learn to recognize:
The quarter-life crisis: Beware the dominant company whose once- sky-high growth has stalled. Its price-to-earnings (P/E) ratio may be just half of its five-year average, and its earnings may have doubled over the past years, but that doesn't mean it will return to former lofty levels. It may have dug itself into a hole by expanding too quickly and paying too much for acquisitions and stock buybacks. Technology may have evolved and competitors may have emerged, stealing some of its thunder (and profits).
The soaring cyclical: Cyclical companies such as semiconductor makers and oilfield services companies, whose fortunes rise and fall with the economy, have counter-intuitive valuations. They look cheapest when they've reached their priciest, and vice versa. A time of high profits means a time of low profits is ahead. Consider these when their P/Es are rising, not shrinking.
The small-cap Methuselah: Here you have century-old small-caps you've never heard of that occasionally grow at rapid rates for a few years. When this happens, Wall Street analysts sometimes expect the growth to continue. But you won't find long-run compounding machines among small-caps. Companies with long histories of creating shareholder value become mid-cap or large-cap companies.
The rule taker: These companies don't have make-or-break rules - they just take them. Their business is standing on the tracks as a technological freight train is about to blow through. Save for a Hail Mary or two, rule-takers are out of options. Examples would be video rental companies in a new age of digital content distribution.
Instead of considering value traps, seek great, simple-to- understand businesses at good prices.
The quarter-life crisis: Beware the dominant company whose once- sky-high growth has stalled. Its price-to-earnings (P/E) ratio may be just half of its five-year average, and its earnings may have doubled over the past years, but that doesn't mean it will return to former lofty levels. It may have dug itself into a hole by expanding too quickly and paying too much for acquisitions and stock buybacks. Technology may have evolved and competitors may have emerged, stealing some of its thunder (and profits).
The soaring cyclical: Cyclical companies such as semiconductor makers and oilfield services companies, whose fortunes rise and fall with the economy, have counter-intuitive valuations. They look cheapest when they've reached their priciest, and vice versa. A time of high profits means a time of low profits is ahead. Consider these when their P/Es are rising, not shrinking.
The small-cap Methuselah: Here you have century-old small-caps you've never heard of that occasionally grow at rapid rates for a few years. When this happens, Wall Street analysts sometimes expect the growth to continue. But you won't find long-run compounding machines among small-caps. Companies with long histories of creating shareholder value become mid-cap or large-cap companies.
The rule taker: These companies don't have make-or-break rules - they just take them. Their business is standing on the tracks as a technological freight train is about to blow through. Save for a Hail Mary or two, rule-takers are out of options. Examples would be video rental companies in a new age of digital content distribution.
Instead of considering value traps, seek great, simple-to- understand businesses at good prices.
Friday, April 16, 2010
SEC accuses Goldman Sachs of civil fraud
One day after watching on CNBC some of Enron: The Smartest Guys in the Room comes this..
The government has accused Goldman Sachs & Co. of defrauding investors by failing to disclose conflicts of interest in mortgage investments it sold as the housing market was faltering.
The Securities and Exchange Commission said in a civil complaint Friday that Goldman failed to disclose that one of its clients helped create — and then bet against — subprime mortgage securities that Goldman sold to investors.
Goldman Sachs denied the allegations. In a statement, it called the SEC's charges "completely unfounded in law and fact" and said it will contest them.
Goldman Sachs shares fell more than 13 percent after the SEC announcement, which also caused shares of other financial companies to sink. The Dow Jones industrial average fell more than 140 points in midday trading.
[Not that I'm equating Goldman Sachs with Enron or anything..]
The government has accused Goldman Sachs & Co. of defrauding investors by failing to disclose conflicts of interest in mortgage investments it sold as the housing market was faltering.
The Securities and Exchange Commission said in a civil complaint Friday that Goldman failed to disclose that one of its clients helped create — and then bet against — subprime mortgage securities that Goldman sold to investors.
Goldman Sachs denied the allegations. In a statement, it called the SEC's charges "completely unfounded in law and fact" and said it will contest them.
Goldman Sachs shares fell more than 13 percent after the SEC announcement, which also caused shares of other financial companies to sink. The Dow Jones industrial average fell more than 140 points in midday trading.
[Not that I'm equating Goldman Sachs with Enron or anything..]
Tuesday, April 13, 2010
T. Rowe Price
Buying obscure or out-of-favor growth stocks is a very reliable recipe for making money in the market. This is an idea Thomas Rowe Price (1898-1983) — the founder of Baltimore-based T. Rowe Price, the firm — hatched back in the 1930s.
Price was a capable hand. He was a growth investor, but he was no fool — he bought growth stocks only when they were cheap. He knew price paid was the important consideration.
Twice in his career, Price closed his fund because he thought the market was too expensive, based on his inability to find cheap growth stocks. Once he closed it from October 1967-June 1970. And the other time was from March 1972-September 1974. During both periods, the market crashed.
Keep in mind that when he closed these funds, he was getting more than $1 million a day in new money from investors wanting to get in the market. Yet when he reopened his fund near the market bottoms — when things were cheap — investor interest was minimal. So there you go. Some things never change. Plus, I think few fund managers today would have the guts to close their fund when so much money — the source of their fees — was coming in.
Price’s idea was very simple on the surface. He thought the best way for an investor to make money in stocks was to buy growth — and then hang on for the long haul. He defined a growth stock this way: “Long-term earnings growth, reaching a new high level per share at the peak of each succeeding major business cycle and which gives indications of reaching new high earnings at the peak of future business cycles.” Note, by Price’s definition, you could own cyclical stocks, which many growth investors these days shun illogically.
Where Price turned Wall Street on its head was in what he thought was the least risky time to own such stocks. Price thought the best and least risky time to own a growth stock was during the early stages of growth.
Most people think that larger, more mature companies are less risky than younger, faster-growing ones. Not so for Price, who looked at companies as following a life cycle, like people do. There was growth, maturity and, finally, decadence. Here is Price in his own words, from a 1939 pamphlet:
“Insurance companies know that a greater risk is involved in insuring the life of a man 50 years old than a man 25, and that a much greater risk is involved in insuring a man of 75 than one of 50. They know, in other words, that risk increases as a man reaches maturity and starts to decline…
“In very much the same way, common sense tells us that an investment in a business affords great gain possibilities and involves less risk of loss while the long-term, or secular, earnings trend is still growing than after it has reached maturity and starts to decline… The risk factor increases when maturity is reached and decadence begins…”
Price went on to show that investing his way during the Great Depression would’ve produced a 67% gain, whereas the rest of the market lost money. In the 1930s, people focused on current dividends, and that meant they were reluctant to invest in a growth stock (which typically pays no dividend). Price thought that was a mistake, as I do. “High current income,” he wrote, “is obtained at the sacrifice of future income…”
In his day, Price was a force of nature. He was known as “Mr. Price” to nearly everyone. He was passionate about investing and still came to the office at the age of 83, rising at 5 a.m. every day. If you want to read more about Price, I would recommend John Train’s The Money Masters, which includes a chapter on Price, along with chapters on many other great investors.
In his day, Price was a force of nature. He was known as “Mr. Price” to nearly everyone. He was passionate about investing and still came to the office at the age of 83, rising at 5 a.m. every day. If you want to read more about Price, I would recommend John Train’s The Money Masters, which includes a chapter on Price, along with chapters on many other great investors.
Sincerely,
Chris Mayer
Penny Sleuth
*** [T. Rowe Price Report, Summer 2012]
Forbes magazine called him the “Sage of Baltimore.” Barron’s described his career as the “triumph of a visionary.” Author John Train devoted a chapter to him in his book profiling a dozen “money masters” of the 20th century.
Ironically, Thomas Rowe Price, Jr., who died in 1983, never studied economics or finance. Nor did he claim unusual insights that were unfathomable to the average investor. To identify fertile fields, he once said, required only “what my grandmother called gumption, my father called horse sense, and most people call common sense.”
And, perhaps because he was a very private person, he had little interaction with Wall Street.
Thomas Rowe Price, Jr.’s successful career was molded by the foresight to anticipate fundamental changes in economic trends, the patience to pursue long-term investment strategies, and the independence and self-confidence to take stands that often put him at odds with conventional wisdom.
“He had the courage to stand by his convictions, even when everybody else disagreed with him,” recalled Charles W. Shaeffer, a colleague who joined Mr. Price when the firm was founded 75 years ago.
“He was never frightened of standing alone when the crowd was going the other way,” Thomas Rowe Price III, his son, said. “In fact, he loved it. He would go the other way sometimes out of sheer obstinacy.”
This frequently required staunch investment fortitude as well as foresight, but Mr. Price usually remained unshakable in his beliefs. His growth stock approach to investing, developed in the 1930s, contradicted the conventional view of stocks as cyclical investments.
“He was truly an independent thinker,” says David Testa, former vice chairman and chief investment officer of the firm. “His idea of looking at growth of the income statement in the middle of the Depression was unique. To have the guts to try and buy companies because they were going to grow in the mid-1930s was
really quite something.”
Jack Laporte, a veteran portfolio manager with the firm, adds, “A lot of people don’t realize how revolutionary many of his thoughts were. In the early 1950s, investors in general thought equities were so risky that they demanded that stocks yield as much or more than bonds. Mr. Price said investors should really focus on growth in dividends and earnings and that was the foundation of his growth stock theory of investing and the Growth Stock Fund.”
Price was a capable hand. He was a growth investor, but he was no fool — he bought growth stocks only when they were cheap. He knew price paid was the important consideration.
Twice in his career, Price closed his fund because he thought the market was too expensive, based on his inability to find cheap growth stocks. Once he closed it from October 1967-June 1970. And the other time was from March 1972-September 1974. During both periods, the market crashed.
Keep in mind that when he closed these funds, he was getting more than $1 million a day in new money from investors wanting to get in the market. Yet when he reopened his fund near the market bottoms — when things were cheap — investor interest was minimal. So there you go. Some things never change. Plus, I think few fund managers today would have the guts to close their fund when so much money — the source of their fees — was coming in.
Price’s idea was very simple on the surface. He thought the best way for an investor to make money in stocks was to buy growth — and then hang on for the long haul. He defined a growth stock this way: “Long-term earnings growth, reaching a new high level per share at the peak of each succeeding major business cycle and which gives indications of reaching new high earnings at the peak of future business cycles.” Note, by Price’s definition, you could own cyclical stocks, which many growth investors these days shun illogically.
Where Price turned Wall Street on its head was in what he thought was the least risky time to own such stocks. Price thought the best and least risky time to own a growth stock was during the early stages of growth.
Most people think that larger, more mature companies are less risky than younger, faster-growing ones. Not so for Price, who looked at companies as following a life cycle, like people do. There was growth, maturity and, finally, decadence. Here is Price in his own words, from a 1939 pamphlet:
“Insurance companies know that a greater risk is involved in insuring the life of a man 50 years old than a man 25, and that a much greater risk is involved in insuring a man of 75 than one of 50. They know, in other words, that risk increases as a man reaches maturity and starts to decline…
“In very much the same way, common sense tells us that an investment in a business affords great gain possibilities and involves less risk of loss while the long-term, or secular, earnings trend is still growing than after it has reached maturity and starts to decline… The risk factor increases when maturity is reached and decadence begins…”
Price went on to show that investing his way during the Great Depression would’ve produced a 67% gain, whereas the rest of the market lost money. In the 1930s, people focused on current dividends, and that meant they were reluctant to invest in a growth stock (which typically pays no dividend). Price thought that was a mistake, as I do. “High current income,” he wrote, “is obtained at the sacrifice of future income…”
In his day, Price was a force of nature. He was known as “Mr. Price” to nearly everyone. He was passionate about investing and still came to the office at the age of 83, rising at 5 a.m. every day. If you want to read more about Price, I would recommend John Train’s The Money Masters, which includes a chapter on Price, along with chapters on many other great investors.
In his day, Price was a force of nature. He was known as “Mr. Price” to nearly everyone. He was passionate about investing and still came to the office at the age of 83, rising at 5 a.m. every day. If you want to read more about Price, I would recommend John Train’s The Money Masters, which includes a chapter on Price, along with chapters on many other great investors.
Sincerely,
Chris Mayer
Penny Sleuth
*** [T. Rowe Price Report, Summer 2012]
Forbes magazine called him the “Sage of Baltimore.” Barron’s described his career as the “triumph of a visionary.” Author John Train devoted a chapter to him in his book profiling a dozen “money masters” of the 20th century.
Ironically, Thomas Rowe Price, Jr., who died in 1983, never studied economics or finance. Nor did he claim unusual insights that were unfathomable to the average investor. To identify fertile fields, he once said, required only “what my grandmother called gumption, my father called horse sense, and most people call common sense.”
And, perhaps because he was a very private person, he had little interaction with Wall Street.
Thomas Rowe Price, Jr.’s successful career was molded by the foresight to anticipate fundamental changes in economic trends, the patience to pursue long-term investment strategies, and the independence and self-confidence to take stands that often put him at odds with conventional wisdom.
“He had the courage to stand by his convictions, even when everybody else disagreed with him,” recalled Charles W. Shaeffer, a colleague who joined Mr. Price when the firm was founded 75 years ago.
“He was never frightened of standing alone when the crowd was going the other way,” Thomas Rowe Price III, his son, said. “In fact, he loved it. He would go the other way sometimes out of sheer obstinacy.”
This frequently required staunch investment fortitude as well as foresight, but Mr. Price usually remained unshakable in his beliefs. His growth stock approach to investing, developed in the 1930s, contradicted the conventional view of stocks as cyclical investments.
“He was truly an independent thinker,” says David Testa, former vice chairman and chief investment officer of the firm. “His idea of looking at growth of the income statement in the middle of the Depression was unique. To have the guts to try and buy companies because they were going to grow in the mid-1930s was
really quite something.”
Jack Laporte, a veteran portfolio manager with the firm, adds, “A lot of people don’t realize how revolutionary many of his thoughts were. In the early 1950s, investors in general thought equities were so risky that they demanded that stocks yield as much or more than bonds. Mr. Price said investors should really focus on growth in dividends and earnings and that was the foundation of his growth stock theory of investing and the Growth Stock Fund.”
Friday, April 02, 2010
concentrated investing
concentrated investors are typically successful. Among brokerage-account holders with at least $100,000, those with just a handful of holdings tend to buy stocks that go on to beat the stocks they sell by three percentage points a year, according to a new study scheduled for publication this fall in the Journal of Financial and Quantitative Analysis. For account holders with lots of stocks, the average record is grim: The stocks sold go on to outperform the ones bought by 1.8 percentage points a year. The second thing to keep in mind is that no one criticizes the small-business owner for staking too much capital in a single company. Your concentrated portfolio makes you a business owner with stakes in five to 10 companies. And you have the advantage of picking the best ones from thousands that are already successful.
[on the other hand]
[on the other hand]