Saturday, March 23, 2013

Timeless Investment Classics

I just picked up Where Are the Customer's Yachts? from BookOff today.

Looking at the reviews of the book, I noticed one by Joseph L. Shaefer at Seeking Alpha ran a series reviewing 10 books that he considered "timeless investment classic"s

1.  Extraordinary Popular Delusions and the Madness of Crowds (1841)

2.  The Crowd: A Study of the Popular Mind (1896)

3.  The Battle for Investment Survival (1935)

4.  Where Are the Customers Yachts? (1940)

5.  Reminiscences of a Stock Operator (1923)

6.  Security Analysis (1934)

7.  The Intelligent Investor (1949)

8.  The Art of Contrary Thinking (1954)

9.  Common Stocks and Uncommon Profits (1958)

10.  The Money Game (1967)

*** [8/25/13]

Tanner Pilatzke's 27 must-read books for investors

*** [8/29/14]  26 more books reviewed

Wednesday, March 20, 2013

don't fear the high

Until the Dow's record on March 5 this year, it had gone 1,973 days without hitting an all-time high. According to Bespoke Investment Group (BIG), that's the sixth-longest stretch the Dow has ever gone without closing at a new all-time high. It's also the second time in the past decade that the Dow has gone more than two years without closing at a new all-time high.

These periods of "drought" are very rare.

As you can see in the table below, going back to 1900, there have only been 10 periods when the Dow went two or more years without closing at a new all-time high. For each period, also shown is how the index performed over the following one, three, six and 12 months.

Looking at the average returns, there isn't much credence to the argument that you shouldn't be buying stocks when the Dow is trading at an all-time high. Over the following one, six and 12 months, the Dow saw better-than-average returns. Furthermore, while the average maximum drawdown (loss) was a decline of 8.5% over the following 12 months, the magnitude of the average maximum gain was more than twice that at over 20%.

Tuesday, March 19, 2013

the President's economic report

Morgan Housel highlights four charts

[1] The budget forecasts that promise trillion-dollar deficits for decades to come overwhelmingly rely on the assumption that health-care costs will spiral higher, just as they did over the past few decades. But lately, per-beneficiary cost growth for Medicare has actually been below the rate of overall economic growth. I've written more extensively about this here, but the bottom line is that we're really bad at forecasting, so the discrepancy between forecasts and reality shouldn't be surprising. And if the trend of recent years holds up, it's a true game-changer: A majority of projected budget deficits will disappear without lifting a finger.

 [2] Evan Soltas of Bloomberg writes:
For much of the middle class, the real net cost of college has not changed significantly [over the past two decades]. ... Data from the College Board show effectively no change in real net tuition and fees for dependent students at four-year public or private universities whose families are in the lower-two income quartiles.
[3] Not only are we currently building too few homes to keep up with demographics, but the skew is almost as large today as it was during last decade's housing bubble -- just in the other direction.

The importance of that can't be overstated enough, which is why I've written about it a lot. People look back at the housing bubble with a sense of amazement. The market was out of control! It was so crazy! Everything was out of balance! But it's virtually the same today. Except this time, rather than a bust, the end game is likely to be a surge in construction.

[4] Yes, real federal government spending has risen sharply since 2008. But real state and local spending declined sharply during that period. Not only is that unheard of in modern recoveries, but it offset part of the rise in government spending. With the recent federal spending sequestration, total state, local, and federal government spending as a share of GDP will probably be the same in 2013 as it was in 2007, before the recession (36%).

[bottom line: it might not be as bad as people think]

Sunday, March 10, 2013

the effects of sequestration

The Federal government has agreed to reduce spending by $1.2 trillion over the next nine years, which amounts to $130 billion a year. This is set to start immediately and then ramp up over time. This fiscal year, $85 billion in cuts are required, and then $85 billion the year after. Subsequently, the spending cuts ratchet up in the years following.

Keep in mind, U.S. GDP is $16 trillion, and the budget deficit is 5.3%, or $840 billion. Therefore, spending cuts of $85 billion takes the U.S. deficit to roughly $760 billion. As U.S. government spending decreases, it reduces GDP, reduces corporate earnings, and could have a negative effect on the market over the short-term.

***

While the sequestration will be a negative for economic growth in the short term, we believe the spending cuts will result in a rise in private growth over the long term.

The U.S. Federal deficit needs to be reduced in order to raise the long-term growth rate potential of the economy. As the U.S. government continues to run a deficit, there is an increasing amount of debt that is issued in the form of treasury bonds.

This debt crowds out investing in the private sector. In the private sector, new ideas, products and companies may not get funded at a lower rate because investors tend to purchase government debt as opposed to lending to corporations. As the debt is reduced, or at least stops growing at such a rapid rate, the economy will benefit over the long term because it will lead to positive growth for the private sector. We believe this is why the market has not reacted negatively to the sequestration. At the end of the day, cutting spending helps long-term GDP growth.

***

The biggest problem with sequestration is that it does not address entitlement programs. Medicare and Social Security are not being touched. Politically, both sides of the aisle do not want to touch entitlement programs that support the elderly because of the historic consequences on national elections.

***

The stock market is soaring to new highs, largely, because of the Fed’s quantitative easing programs. The biggest risk to the market is the reversal of those programs as we believe that would trigger a massive sell-off in the equity market.

Cutting spending actually reduces the risk that quantitative easing will stop. This is because the budget cuts soften the economy, which allows the Fed to continue to essentially print money. Effectively, budget cuts increase unemployment and therefore reduce the chance that the Fed is going to scale back their quantitative easing programs anytime soon.

Cutting spending has become a sideshow. The Fed is the key. The fact that the stock market is approaching new highs is proof that the market and economy are fine with these cuts.

What’s Next

Down the road, we need to see the politicians agree to more spending cuts, and agree to do it rationally. This would help the stock market and the economy. So far, they are not doing it in a coherent, economically efficient, fashion.

-- Mitch Zacks, ZIM Weekly Update

***

The sequester has been advertised as “cutting” discretionary spending over a ten year period by $995 billion. After inflation adjustments and exempting more than a trillion dollars of defense and non defense discretionary spending from the sequester, the CBO projects  (in its Table 1.1) discretionary spending to increase by $110 billion over the decade. There is no actual $995 billion cut after the CBO applies its magic adjustments. Rather there is a $110 billion increase.

[In other words, instead of increasing by $1105 billion, it will increase by $110 billion.  So about a 90% reduction of increased spending.]

Friday, March 08, 2013

jobless rate at four year low

Job growth surged last month as auto makers, builders and retailers pushed the unemployment rate to a four-year low, defying concerns that budget battles in Washington would harm the economic expansion.

Employment rose 236,000 last month after a revised 119,000 gain in January that was smaller than first estimated, Labor Department figures showed today in Washington. The median forecast of 90 economists surveyed by Bloomberg projected an advance of 165,000. The jobless rate dropped to 7.7 percent, the lowest since December 2008, from 7.9 percent.

Stocks, the dollar and Treasury yields all rose on signs the world’s largest economy is gaining strength in the face of federal budget cuts and higher payroll taxes. The report may fuel debate among Federal Reserve policy makers considering how long to maintain record stimulus to boost growth and employment.

[which could be bad for the stock market.  when the unemployment rate drops and gdp grows, the Fed will stop buying bonds, raise the interest rate, making stocks less attractive]

Thursday, March 07, 2013

the next Berkshire Hathaway

I'm looking at this blurb (via junk mail) touting the next Berkshire Hathaway.  [It's trying to push a subscription to Charles Mizrahi's Inevitable Weath Portolio.]

I'm not about to send for the free report, but I'm sort of curious who it might be.

Googling the next Berkshire Hathaway reveals some candidates:

Sears
Loews, Leucadia National, PICO Holdings, Biglari Holdings
Markel
JSHLY, SNFCA

Ah, here's the answer.  It's Leucadia.

I remember I bought OTTR because there was an article comparing it to Berkshire Hathaway.  Let me see if I can dig it up.

It was a 2008 CNBC video interviewing James Altucher.  He mentions OTTR, MKL, and LUK.

Tuesday, March 05, 2013

Dow sets all-time high

The Dow climbed more than 125 points to close at a record high of 14,253.77, topping the prior record set in October 2007. Earlier, the blue chip index climbed to an intraday record of 14,286.37.

The S&P 500 added 15 points and finished at its highest level since October 2007 and is now only about 2% away from its record closing high.

"We're back to the highest levels in history, but we've got more things going for the economy and the market than we did last time," said Art Hogan, managing director at Lazard Capital.

Back in 2007, the economy was on the verge of winding down and heading into a tailspin, he said, whereas now it's continuing to improve, albeit slowly.

Stocks are also cheaper now. They were trading at 17 times earnings estimates in 2007. Currently, stocks are valued at about 14 times earnings estimates for 2013.

Plus, both consumers and businesses have more cash and less debt, said Hogan.

Still, not all stocks are at record highs. The Nasdaq, which rose more than 42 points Tuesday, is nearly 40% below its all-time highs that were set in March 2000, prior to the collapse of the dotcom bubble. The Nasdaq is trading at its highest level since November 2000 though.

the wild circus

Value investing ultimately wins, but in the process it passes through a wild circus of lunacy.
-- Ron Suskind

January 2013 has gone down in the books as having the highest levels of inflows into U.S. equity mutual funds since March 2000, the dying days of the dot-com bubble. The week ended Jan. 11 alone saw net inflows into funds of $8.9 billion -- the fourth-largest amount ever recorded, according to B of A Merrill Lynch Global Investment Strategy, EPFR Global, and Lipper FMI. This, of course, came right on the heels of the legislative agreement to avoid the fiscal cliff that solved the most recent in a too-long series of macroeconomic crises that threatened the global economy.

Well, consider us saved -- at least for a few months.

Take a look at that opening paragraph again and consider the implications. The last time so much money came pouring into stocks (using stock mutual funds as a reasonable proxy), valuations were really, really high. About that time, Warren Buffett said stocks were so richly priced that he expected the overall market returns for the decade to be in the low single digits. For this, and for his unwillingness to buy into the "New Economy" companies, Buffett was derided as having lost his touch. The scoreboard suggests otherwise.

It's my observation that intelligence and analytical firepower are less important for long-term investing success than simply having the confidence to invest when others are fearful. Those who bought in March 2000 have, on average, suffered more than a decade's worth of negative returns.

Saturday, March 02, 2013

Martin Zweig

Martin E. Zweig, who predicted the 1987 stock market crash and whose newsletters influenced U.S.investors for a quarter century, has died. He was 70.

He died yesterday, according to Zweig-DiMenna Associates LLC, his New York-based firm. No cause of death was given.

Zweig wrote “Martin Zweig’s Winning on Wall Street,” his book first published in 1986, and stock-picking newsletters such as the Zweig Forecast for 26 years, helping start his career in hedge funds and philanthropy. He co-founded Zweig-DiMenna Partners in 1984 and, according to the New York Times, bought a 16-room apartment at Manhattan’s Pierre hotel in 1999 for $21.5 million. He also had a residence in Fisher Island, Florida.

“I was on the road show with Marty for the Zweig Fund in 1986 and he was like a rock star,” Gene Glaser, a business partner with Zweig from 1989 to 1999, said today in an interview. “People would wait around to get his autograph and ask him questions about the market.”

Zweig began his career in the 1970s writing investment newsletters, which became the Zweig Forecast, published from 1971 to 1997, the company said in a statement through Business Wire. In 1984, Zweig and Joe DiMenna founded Zweig-DiMenna Partners, their first long-short hedge fund, followed by the Zweig Fund in 1986 and the Zweig Total Return Fund in 1988.

A regular guest on the PBS television show “Wall Street Week With Louis Rukeyser,” Zweig is credited with developing the technical analysis tool known as the put-call ratio, according to his firm. The indicator plots bearish versus bullish options as a way of determining investor sentiment.

Zweig’s best-known call came during Rukeyser’s program on Oct. 16, 1987, when he predicted stocks were poised for a “vicious” decline reminiscent of the crash of 1929. The Dow Jones Industrial Average plunged 508 points, or a record 23 percent, in the next session, now known as Black Monday.

“I haven’t been looking for a bear market per se, really, in my own mind I’m looking for a crash,” Zweig said in the PBS interview. “I only look for a brief decline, but a vicious one.” The Dow declined 23 percent in October 1987 and climbed 2.3 percent that year, according to data compiled by Bloomberg.

“He was a pioneer in technical analysis,” said Richard Russell, editor of the Dow Theory Letters newsletter, in a telephone interview. Zweig was a “terrible worrier,” said Russell, who took over Zweig’s investment advisory service.

***

Liz Ann Sonders remembers:

On February 18, while on vacation, I received a shocking phone call. My first mentor and boss, Wall Street icon Marty Zweig, had passed away. I've been extremely blessed throughout my 27-year career to work with some of the most transformative and legendary folks in the business. Marty was one.

I worked for him (and his partner at Avatar Associates, Ned Babbitt) for 13 years, starting in 1986 after I graduated from college. Another would be Louis Rukeyser, with whom Marty and I shared the "stage" on Wall $treet Week for many years as regular panelists. And of course, I've had the great thrill of working for Chuck Schwab since 2000. It doesn't get any better than learning from these legends over the past 27 years.

After degrees from Wharton, University of Miami and Michigan State, Marty started his career in academia but ultimately became one of the most respected stock market "gurus" in the modern era. I have years' worth of memories of Marty, and hope readers will indulge me as I reminisce and share some of the most important market lessons I learned from one of the greats.

But first, the personal stuff. Marty was brilliant, there's no doubt; but he was also quirky, goofy and affable. He was the consummate worrier... but he was also the ultimate warrior. He lived, ate and breathed the markets and perpetually (and tirelessly) strived to "figure it out."

One of my greatest memories is getting to see first-hand his now-famous memorabilia collection—to which there are no comparables. Among them, there was the dress Marilyn Monroe wore while singing Happy Birthday to John F. Kennedy in 1962; the suits worn by the Beatles on the Ed Sullivan Show in 1964; the 1992 Olympics' US "Dream Team" basketball jerseys; the booking sheet from one of Al Capone's arrests; a letter from Madonna to Michigan State declining acceptance so she could pursue a music career; guitars of many rock stars, including Bruce Springsteen and Jimi Hendrix; the fedora worn by Humphrey Bogart in Casablanca; the original Terminator costume worn by Arnold Schwarzenegger; and multiple boxing championship belts, Super Bowl rings and Heisman Trophies.

Probably the coolest one, which I got to sit on at his home in Connecticut, was the Harley Davidson Hydra-Glide motorcycle ridden by Peter Fonda in Easy Rider. It was bolted to the floor in his game room. How cool is that?! Apparently, last year he also had a banana yellow 1934 Packard convertible installed in his Florida living room. Marty was loads of fun.

In Marty's book Winning on Wall Street, he called Jesse Livermore one of his heroes and "one of the most fabulous traders of all time;" recommending that people read the 1923 book about Livermore, Reminiscences of a Stock Operator by Edwin Lefevre. It was the first book about the market I read; it remains one of my favorites, and one I always recommend when people ask about the best market books.

Here's a quote from Livermore: "People don't seem to grasp easily the fundamentals of stock trading. I have often said that to buy into a rising market is the most comfortable way of buying stocks… Remember that stocks are never too high for you to begin buying or too low to begin selling." These words were quoted often by Marty, because he believed in "buying strength, selling weakness and staying in gear with the tape."

Marty is also given credit for popularizing the phrase "The trend is your friend." He was a trend follower, not a trend fighter; smart enough to realize that "a slap is easier to recover from than a beating…" He considered himself both conservative and aggressive. By nature he was conservative and risk-averse, wanting to protect himself and the people to whom he gave advice. But he also believed there were times to be aggressive. "The problem with most people who play the market is that they are not flexible."

"Summing it up, to succeed in the market you must have discipline, flexibility—and patience. You have to wait for the tape to give its message before you buy or sell." These words from Marty still ring true, and it's why I cringe when I'm asked about market tops and bottoms as if anyone can call them precisely. "…you must forget about trying to catch the exact tops or bottoms, which no one can consistently do anyhow. But success in the market doesn't require catching those tops and bottoms. Success means making profits and avoiding losses. By using [his theories] and waiting for a trend to develop, you can make money, stay in tune with the tape and interest rates, and, best of all, sleep better at night."

Friday, March 01, 2013

gravestone doji candlestick (uh oh)

Buddy has called for a bearish reversal of the market as a gravestone doji candlestick pattern occurred (on 2/28/13).

What's that?

A type of candlestick pattern that is formed when the opening and closing price of the underlying asset are equal and occur at the low of the day. The long upper shadow suggests that the day's buying buying pressure was countered by the sellers and that the forces of supply and demand are nearing a balance. This pattern is commonly used to suggest that the direction of the trend maybe be nearing a major turning point.


***

After being down earlier, the market finished up, forming a hammer.  Gravestone followed by a hammer.  That means ... (who knows?)