Tuesday, December 30, 2014

7 Keys to Managing Risk

"that will put your portfolio on the road to steady, predictable growth!"

-- courtesy of the folks from VectorVest

Here are the 7 keys:

1. Diversify
2. Dollar weight
3. Keep commissions low
4. Market follow through
5. Step-in
6. The 50% rule
7. The 1% rule

Sunday, December 28, 2014

time in the market

Investor Nick Murray once said, "Timing the market is a fool's game, whereas time in the market is your greatest natural advantage." Remember this the next time you're compelled to cash out.

Definitely. In fact, a growing body of research is finding that chasing returns is a killer for many investors.

[via roy]

This is also misconception no. 8 from from Chapter 1 in Chuck Price's book Investing Simplified: What You Don't Know Can Hurt You.

Saturday, December 27, 2014

Allan Mecham, the 400% Man

[2/19/12] On a fall day in 2010, half a dozen wealthy investors and portfolio managers converged on an office in midtown Manhattan. These were serious Wall Street moneymen; in aggregate, they handled more than a billion dollars. They had access to the most exclusive hedge funds and investment partnerships and often rubbed shoulders with the elite of New York, Greenwich and Palm Beach.

But on this day, they had turned out to meet an unknown college dropout from Utah -- and to find out how he was knocking them all into a cocked hat.

The unknown, Allan Mecham, had been posting mind-bogglingly high returns for a decade at a tiny private-investment fund called Arlington Value Management, and the Wall Streeters were considering jumping on board.

Over a 12-year stretch, through the end of 2011, Mecham, now a mere 34 years old, has earned an astounding cumulative return of more than 400 percent by investing in the stock of U.S. companies -- many of them larger ones like Philip Morris, AutoZone and PepsiCo. That investment performance leaves the stock market indexes and most mutual funds trailing far in the dust. Of the thousands of mutual funds in America, only a smattering of stock-oriented funds have done better, according to Lipper. Arlington, which is structured like a hedge fund, has put most firms in that category deep in the shade as well. It even managed to turn a profit during the crash of 2008, when Standard & Poor's 500-stock index fell nearly 40 percent. And Mecham has done this mostly while sitting in an armchair, in an office above a taco shop, in downtown Salt Lake City.

His investment approach will be familiar to anyone who has been even a casual follower of Buffett. Mecham looks for businesses with great long-term prospects, great management, strong cash flow and big defensive "moats," or barriers to entry for potential competitors. And he stresses the importance of sitting still and doing nothing. "Activity is the enemy of returns," says Mecham. "If I find two new ideas a year, that's phenomenal."

[via libertarians_2000]

***

[3/23/12] Mecham, whose stellar returns were highlighted in the March edition of Smart Money, tells his investors that last year he levered up the fund and has invested half the money in Warren Buffett's Berkshire Hathaway.

"Able to borrow at around 1.5%, we levered (Berkshire) into a 50%+ position," he wrote in his annual letter to shareholders. "Though not advocates of leverage, we believe the low cost and modest amount, combined with [Berkshire's] iron-clad safety and cheap price, makes our action sensible."

There is some method to the madness. Mecham, a long-term Buffett disciple, argues that Berkshire Hathaway stock, on its own, "provides ample diversity, with exposure to disparate businesses (more than 70), sectors, and asset allocations." Berkshire's assets include a ton of cash-generative businesses, a book of blue-chip public stocks valued at more than $75 billion, and nearly $40 billion in cash, he says.

Short-term gains are irrelevant, but Mecham built up the huge Berkshire Hathaway position before the announcement, last September, that Berkshire would start buying back stock.

Since then stock has zoomed about 16%, from around $105,000 to $122,000.

***

[12/27/14] This weekend I came across a link to an excellent Manual of Ideas interview with Allan Mecham that I've read before, but I decided to read through it again. There are a few key points that Mecham brings up that I think are really worth repeating, so I thought I’d highlight them here.

Understand what you are buying

The first is the concept of understanding a business like an owner.

Mecham said something interesting when asked how he generates ideas:

“Mainly by reading a lot. I don’t have a scientific model to generate ideas. I’m weary of most screens. The one screen I’ve done in the past was by market cap, then I started alphabetically… Over the past 13+ years, I’ve built up a base of companies that I understand well and would like to own at the right price. We tend to stay within this small circle of companies, owning the same names multiple times. It’s rare for us to buy a company we haven’t researched and followed for a number of years—we like to stick to what we know.”

Unforced Errors

Speaking of unforced errors, Mecham references the importance of reducing them when answering a question on mistakes investors tend to make:

“Patience, discipline, and intellectual honest are the main factors in my opinion. Most investors are their own worst enemies—buying and selling too often, ignorning the boundaries of their mental horsepower. I think if investors adopted an ethos of not fooling themselves, and focused on reducing unforced errors as opposed to hitting the next home run, returns would improve dramatically. This is where the individual investor has a huge advantage over the professional; most fund managers don’t have the leeway to patiently wait for the exceptional opportunity.”

Beware the Lottery Ticket Investments

The concept of focusing on the downside brings me to a tangential topic that I'd like to briefly talk about, and that is the allure of the “lottery ticket” investment. This is the type of investment that has long odds of paying off but could result in a huge payday if it works. For example, let’s say investment has a 40% chance of making 5 times your money, and a 60% chance of going to 0. In theory, this investment has a high expected value, and should be taken (if you could make this investment 10 times, 4 times out of 10 you’ll make 5 times your money, which far more than compensates for the 6 times your investment went to 0). In other words, if you bet $1 on a situation like this 10 times, you’d end up with $20 on a $10 total investment.

One thing I’ve observed over time is that market participants tend to overestimate the probability of the favorable outcome. It’s very easy to do this for a number of reasons: one, we are generally optimistic beings. Two, we naturally want to find a situation with high expected value like the one described above.

I think in general, it’s much better to simply focus on simple situations that you understand very well—good businesses at bargain prices—and patiently keep building out your circle of competence while waiting for the proverbial fat pitch. Home runs will help increase long term returns, but they don’t need to come from swinging at really difficult pitches that are outside the strike zone.

*** [12/27/14]

Is this the next Warren Buffett?

*** [1/6/15]  The 400% Man

Friday, December 26, 2014

two important points

You've probably seen the headlines: New York magazine admits to being conned. The biweekly published a story of a brilliant New York high school student--Stuyvesant High School, naturally--who had made $72 million, or something near that amount (he was coy), from stock trading. In truth, he had made nothing. The student's stock market experience consisted of simulated trades at Stuyvesant's investment club, where, he claims, performance was "incredible," as his portfolio "outperformed the S&P 500."

(Note that the quote equates "incredible" with beating a market index. Oh, how active management has fallen ...)

You might wonder how the story got into the magazine. The obvious answer is that journalistic standards have badly slipped. That is how the story has been reported.

While correct in its way, that reason glides over two other important points.

One is that people are bad in math. For example, when I was in junior high school, a syndicated newspaper column stated that if two dice were rolled 100 times, the average sum would be 638. (The column was marketed as a "Grab Bag" of little-known facts. True enough: That the dice would sum to 638 was indeed little known.) That rather basic error escaped the writer, his syndication editor(s), and the local newspaper's staff. As the column never ran a correction, it seems that the mistake escaped many others as well.

To cite another example, in the 1990s the Beardstown Ladies had convinced themselves (through bad math, ironically) that their amateur stock portfolio had grown an annualized 23% for the decade from 1984-93. That was scarcely credible, as the S&P 500 had gained less than 15% per year, only two U.S. diversified stock funds had beaten 18%, and the Ladies followed a stolid investment strategy of buying and holding blue chips. Where on earth could they generate so much extra alpha?

Nowhere on this planet, it turned out. The Ladies' claims went unchallenged for several years. Eventually somebody realized that the Ladies couldn't possibly have been correct. The portfolio's actual annualized gain after costs, it turned out, was only 9%.

The too-good-to-be-true stories have a second essential prop: naivete. Those who do not invest tend to grossly overestimate what actual investors can accomplish. My father, for example, would have fervently believed the New York story. He invested only occasionally--just enough to "learn" that those in the know reaped fabulous gains, while he sadly did not. (He was skilled at accumulating tax-loss carryforwards but less adept at generating gains against which to offset them.)

My father was undeterred by the math of the improbable. For one, he wouldn't do the work. He wasn't about to calculate that even if a teenage boy somehow got $1 million to invest when entering high school, the youth would have needed to make more than 300% annually over the next three years to achieve his claims. But even more, he didn't wish to know the answer. He liked his fantasies. He relished dreaming of when he would crack the code, so that he, too, could make the easy money.

In that he was not alone. Famously, Discover Brokerage Direct ran a 1999 commercial featuring a truck driver who owned a private island, courtesy of day trading. While the ad was not meant to be taken literally, neither was it intended as a complete joke. The company selected an amateur actor to play the role of the truck driver, so as to make the ad feel more like a documentary. It wished for viewers to believe that the most ordinary of Americans could become investment geniuses.

Saturday, December 20, 2014

Reitmeister / Zacks 2014

[12/20/14] The 32% gain for the S&P last year was a blessing
and a curse for investors.

A blessing because it padded all of our portfolios.

A curse because the gains came far too easily, making 2014 a brutal environment by comparison.

Yes, the S&P is up on the year, but still many small caps and glamour growth stocks are in the red. Plus the volatility made it like a house of mirrors where you were never quite sure what to make of the investment landscape.

Now we get to put this miserable year behind us as we look ahead to 2015. And after much contemplation, here is my outlook...

It will be exactly like 2014.

(End of Commentary)

[12/12/14] On the Monday after Thanksgiving the market tumbled because of a "supposedly" weak Christmas shopping weekend. I pointed out that this Grinch would be proven wrong in time.

Why?

Because the shape of holiday shopping changes each season as retailers have their big promotions earlier and earlier. Plus the appeal of online shopping continues to grow for consumers who want to save money and avoid the crowds. This delays some shopping til closer to Christmas.

My theory was simple. The improving employment trends, combined with gains in consumer sentiment/confidence readings, would lead to ample growth for retailers this important time of year. On Thursday morning more concrete proof rolled in with a much stronger than expected November Retail Sales report. With that US stocks bounced robustly, especially consumer oriented names.

Now it is time for the Grinch to step aside so Santa can deliver new highs before the curtain closes on 2014.

[and then the Dow proceeds to drop 316 points]

[12/11/14 - after the Dow went down 268 to 17533] Why are stocks going down?

Because they can. (End of statement)

This is to say that the bull market is still firmly in place. Just every now and then investors want to take profits. And that action comes in surging waves as folks don't want to be the last one out the door.

The key is to never have the fear that emanates from short term selling sprees blind you from the real fundamentals that will drive stocks in the future. And as should be clear from the strong economic data in the US, going higher is the only logical conclusion for stocks until the next recession wakes the bear from his hibernation.

Read: Buy the Dip!

[11/6/14] Mid-term election time is historically a boon for stock investors. Going back 80 years, which is 20 mid-term election cycles, the stock market has risen around the election 95% of the time.

This means it has nothing to do with Republicans or Democrats being in charge. It simply has to do with investors hating indecision. So once the election results are finalized, stocks almost always head higher. This time was no exception.

Helping the cause Wednesday were strong economic reports like ADP Employment and ISM Services. This pushed the S&P to a new closing high at 2023. It is becoming more apparent that 2100 will be hit before 1900. So stay bullish.

[10/19/14 Mitch Zacks] Roughly five years from now the S&P 500 should be 25-45% higher than its current value. This is exactly what has occurred historically. We know how the equity investment game ends. It is a roller-coaster ride which ends with the market heading higher at around a 6% annual rate of return above the risk-free rate.

We also know that economies can contract, but that such contractions do not last for more than a few quarters. As a result, a long-term investor should be a buyer of the equity market during a sell-off that is driven by recession fears. All recessions or deflationary environments eventually end.

Here's What You Should Worry About

Beware of buying the market at a valuation level that is too high. But remember that for now stocks remain cheap relative to bonds. The slight selling since mid-September makes stocks more attractive rather than less attractive relative to bonds. And because valuation metrics are reasonable, the recent selling in the market should be seen as a potential buying opportunity.

Selling like we have seen over the past few weeks takes the froth out of the market. What kills investors over time is not the possibility of an economic slowdown or even a recession. It is purchasing stocks in periods of excessive valuations. If you understand that the compression in corporate earnings that occurred in '08 was not an event that is likely to be repeated, the stock market remains attractively valued.

[10/12/14 Zacks Weekly Update] As the economy is not heading into a recession, the current weakness in the stock market presents a buying opportunity for investors. If we project out three to five years from now, interest rates are most likely going to be higher than they are currently and the economy is going to be larger with projected growth of around 3% per year.

However, since we are near 60-year lows on interest rates, my expectation is for interest rates to not increase that dramatically. As a result, equities should continue to perform well over the next few years.

I continue to see the market heading higher from its current level into the last quarter of 2014. Yes, October has traditionally been a weak month for equities, and although I do not put much faith in calendar anomalies, we certainly were overdue for a bit of selling. Once investors finish digesting the end of QE3 and see that the economic expansion is on track the market should begin to trend higher

[10/10/14] As Mama always said...

"If you have nothing nice to say, then best not say anything at all".

Given my fundamental disagreement with market direction of late, then I am going to take Mamas advice today. Hopefully this change of pace will induce a better outcome for stocks. If not, then I will end my silent treatment and get back to the usual market commentary.

[didn't work]

[10/8/14] The US stock market fell -1.5% on Tuesday. Why? Mostly become of shockingly weak economic news out of Germany, which is considered the bellwether European nation.

In the simplest possible terms, this is why this sell off is ridiculous.

EU GDP in 2012 was -0.4%. That's terrible, but US GDP that year was a quite healthy +2.8 allowing the S&P 500 to rise +16%. So no harm done by Europe.

EU GDP in 2013 was +0.1%. Anemic growth for sure, but US GDP ratcheted up another +1.9% while the S&P 500 soared +32%. Again, the US was immune to Europe's economic disease.

I think the point should be clear from above. Until the US economy shows any real damage from European economic malaise, then US stock investors should pay it no mind.

Buy the dip is still the order of the day.

[10/3/14] Thursday provided a roller coaster ride for stock investors. Some were excited and wanted to ride again. While others decided to take a pass as they were slumped, head first, into a garbage can ;-)

The best news on the day was that the Russell 2000 actually gained 1%. This could be the long awaited sign that folks are ready to get back into riskier stocks, which would lead to a resumption of the bull rally.

As you know, I already got back to 100% long on Wednesday's dip. That is because the fundamentals say there is more room to run to the upside than downside at this time. Bolstering this case was the continued decline of weekly Jobless Claims. In fact, we now have the lowest number of people getting unemployment checks in the past eight years.

Today brings two other market moving announcements: September Employment Situation and ISM Services. If good news, then Thursday's bounce should gain more speed. If bad news, then 1900 will be tested soon.

Place your bets!

[10/2/14]  Correction: In yesterday's commentary I mistakenly said the S&P closed under its 100 day moving average. Actually I meant to say it closed under the 50 day. Sorry for any confusion.

Yet Wednesday we did indeed close under the 100 day moving average. The reasons for the continued decline are laughable and provide a great chance to buy the dip (which is exactly what I did in the Reitmeister Trading Alert portfolio when I put the 25% cash position back to work and now 100% long stocks.)

Reity, why is this drop laughable?

Look no further than the economic data on tap yesterday. ADP Employment showed 202K jobs added last month and this month rose to 213K. This proves the continued improvement of the jobs market.

Next up was ISM Manufacturing. The 56.6 reading was the 3rd best showing this year. If you went back 12, 18, 24, even 36 months to share both of these readings with investors they would be drooling over themselves with bullish giddiness.

So yes, the previous month's reading of 59.0 was higher...but it was not at a realistically sustainable level. Now we are just reverting to a more comfortable mean which still provides ample growth for the economy and corporate earnings and stock prices.

By the way, the forward looking New Orders component is still red hot at 60.0. That means manufacturing will be in growth mode for a lot longer.

Yes, stocks could go lower for a while just because irrational behavior has no specific expiration date. But looking out on the horizon, buying this dip will be the more profitable move than running for the hills like so many others.

*** meanwhile, here's a sponsor message from the same email...

World-renowned economist Harry Dent now says, "We'll see an historic drop to 6,000... and when the dust settles – it'll plummet to 3,300. Along the way, we'll see another real estate collapse, gold will sink to $750 an ounce and unemployment will skyrocket... It's going to get ugly."

Considering his near-perfect track record of predicting economic events long before they occur, you need to take action to protect yourself now.

[9/26/14] Stocks broke down under the 50 day moving average Thursday in a nasty day of selling. I don't think there is a sound fundamental reason for this move. I just sense that investors have become too complacent and need to get shaken up a bit more. As such I think we will probe a little further below.

Without a sound fundamental basis for a decline, then probably the 100 day moving average at 1954 will provide ample support. If not, then perhaps it is time to once again test the 200 day moving average at 1896 (but soon will be 1900 which is formidable support).

When stock gains become too easy, this is just Mr. Market's way to provide a wake up call that investments do involve risk. Once the lesson is learned, then it will pave the way for stocks making new highs once again.

[9/11/14] Kevin Cook is bullish, so says keep buying the dips (video)

[9/8/14 Reity] I want to thank the US government for their typical incompetence in providing reliable economic data. I have ZERO doubt that the 142,000 job additions reported Friday morning is completely wrong and will be revised upward in the future.

The best part about this report is that the Fed will consider it a dose of caution as to not raise rates too soon. Again, their two stated goals are to achieve maximum employment and keep inflation in check. At 6.1% unemployment (and a ton of underemployment) then they will not raise rates too quickly...which is good news for stock valuations.

This is truly a Goldilocks report for investors as most everything else points to acceleration in GDP and corporate earnings while the Fed stays on the sidelines. I'm happy I got back to fully long Thursday just in time for the breakout.

[8/21/14 Reity] The S&P is less than five points away from the all-time high of 1991. Unfortunately right after we reached that summit last time, stocks started to sell off. Within just a couple weeks stocks fell to as low as 1905. And rolling back to many of the previous times a new record was made was not so glorious in the days following.

Reity, what will happen this time around?

Obviously the exact chain of events is unknown and unknowable. So here is my best guestimate.

•  Stocks have no problem taking out the previous high of 1991.

•  Then keep running to hit 2000 and even just a shade above.

•  And just when almost everyone gets sucked into thinking that a breakout above 2000 is taking place is exactly when the Market Gods pull the rug out. Meaning a pullback commences and then we consolidate under 2000 for a while.

This view explains why I am starting to pocket some trading profits on the move up to 2000. I will reallocate that cash into my favorite stocks after a pullback because the long term bull market is still in full effect until there are greater fundamental reasons to turn bearish.

[8/10/14 Mitch] The most important issue facing the market right now is not whether the economy will grow and earnings will expand. The data shows that this is the likely near-term outcome. The major issue is not if the economy expands but rather whether the expansion will be accompanied by inflation.

Inflation data is extremely important with respect to the S&P 500's performance over the next six months. Here's why: The degree of price inflation is going to determine when and to what extent the Federal Reserve hikes rates. Right now, we are looking for the QE3 to end in the second half of 2014 and for the first rate hike to materialize in the second quarter of 2015.

If inflation comes in higher than expected, the Federal Reserve will need to tighten sooner and the market will be under pressure. But if inflation is lighter than the Federal Reserve expects, the market will strengthen for the remainder of the year.

The current 10-year treasury yield is 2.42%. If there was any whiff of inflation, the ten-year treasury yield would likely be above 3% and closer to 5%. Thus, the bond market is telling us that the Federal Reserve is not going to be hiking interest rates as soon as the masses believe. If this were not the case, the ten-year yield would be higher.

How Should You Approach the Market Now?

As I told an individual client Friday morning, when you consider the market's returns over the past two years common sense seems to indicate that we are overdue for some type of market correction. I think it is prudent to psychologically prepare for some degree of selling in the market.

The ten-year yield must return at some point to its long-term average of 5.2%. When the rates go up P/E multiples will fall and stocks should come under some pressure.

However...

Bond investors are talking with their dollars and telling us something else entirely. They are saying that the Federal Reserve has the wiggle room to keep rates lower for longer than most equity investors currently are expecting. This would seem to signal that the market can move higher in the short-term.

[6/8/14 Mitch] the U.S. stock market is hitting new highs not on growth prospects but rather on the belief that worldwide interest rates are not going much higher. The reason is the Europeans.

Europeans – due to World War II – have a pre-occupation with preventing inflation almost built into their DNA. This concern about inflation is so great that one of the unstated goals in forming the European Union was to take monetary policy away from the European periphery countries. As a result of this obsession regarding inflation, the Europeans were reluctant following the '08 crisis to loosen monetary policy for concerns of causing inflation.

If you remember, in the U.S. we increased spending and engaged in monetary stimulus in response to the '08 crisis. The Europeans for the most part preached austerity (cutting fiscal spending and raising taxes) and were slow to engage in monetary stimulus. Fast forward a few years and the U.S. is beginning to pull back its monetary stimulus so as not to stoke the flames of inflation. But European policy makers are now completely focused on deflation and show no signs of pulling back the monetary stimulus anytime soon.

This is good for the stock market in the short-run as it means interest rates will remain lower for longer than previously anticipated. This explains why the market is hitting new highs while corporate earnings remains lackluster.

This does not bother the Federal Reserve because the people are made wealthier as the stock market rises. When people have more assets they tend to buy more things. In other words, this wealth effect helps contribute to economic growth. Driving the stock market upward in value causes people to begin to buy more stuff.

The problem, of course, is that rates are about as low as they can go. Or so we thought. What happened in Europe last week is that the European Central Bank actually lowered what is called the deposit rate to below zero for the first time ever. This means that the European Central Bank will actually charge member banks for keeping their deposits at the central bank.

We could be entering a period in which a recession occurs and at the same time interest rates rise. At times like these the stock market generates the majority of its losses. My concern is that the constant monetary easing by multiple central banks around the world is creating a situation where this bad scenario is becoming more and more likely to materialize.

Don't get me wrong. The central bank activity in the U.S. has been instrumental in spurring the economy to recover from the last recession. The problem is that when a central bank effectively buys bonds they are borrowing from the future. It is a means of essentially pulling economic growth from the future into the current period. The net result is that the future growth must be muted. This is exactly what we are seeing in the U.S., and it is also what we are seeing worldwide.

My concern is this:

The bond buying that central banks are engineering across the world to prop up financial markets and spur economic growth through a wealth effect will eventually have a bill come due. That bill in my mind very clearly comes due when the next recession hits the central banks and they will not be able to provide monetary stimulus to the same extent as before. Additionally, if inflation starts to materialize at the same time a recession hits, watch out below.

Right now as an equity investor you have the benefit of every major central bank across the world engaging in some form of monetary easing. As the saying goes, you don't fight the Fed and the best bet is to continue to look for market appreciation. However, the longer a correction is put off the more severe the correction will be when it materializes. This bull market in the short-term will likely continue to climb the wall-of-worry, but when the correction materializes it will be far more violent.

We must always remember that the potential for a sell-off exists every single day in the stock market. So while the market may be going higher in the short run, eventually interest rates must rise. When they do, the market is going to come under pressure.

[5/25/14 Mitch] With the S&P 500 hitting new highs it is very important not to become complacent. As I have said numerous times before, when the market hits new highs it is generally an indication that more new highs are in store. Nevertheless, I am becoming concerned about the low levels of expected risk across the market.

Last week, the VIX index reached its lowest level since before the eve of turmoil in 2007 that preceded the crash of ’08. Should we be cheering? Doesn’t this indicate that market participants view the S&P 500 as being less risky – or less volatile going forward? Doesn’t the low VIX level indicate that investors do not expect the S&P 500 to bounce around that much in the future?

The answer is yes, that is exactly what the option markets are telling us. The problem is that what has historically happened is the opposite.

You see if you track the VIX over time you find that the index is very definitely mean-reverting. Statistical analysis clearly shows the VIX follows a mean-reverting time series.

So periods of low expected volatility are often followed by periods of high realized volatility and vice versa. Looking at the VIX over the past ten years, I see that when the VIX gets too low it often shoots up in the future. Similarly, when the VIX gets too high it often falls.

My conclusion is that we are overdue for a spike like we saw in’08, ’10 , and ’11. It comes back to the belief that things have been too calm for too long in the equity markets. We are due for a spike in volatility which almost always accompanies selling in the market.

Now is not the time to be chasing high-beta stocks. It is better to be buying Wal-Mart( WMT) than Facebook( FB) as Wal-Mart is going to hold up much better when volatility spikes than Facebook.

[WMT is currently at 75.61.  FB is currently at 61.35.]

[5/11/14 Mitch Zacks] When Zacks Investment Management was a much smaller company we used to have our holiday parties around a table. Ben Zacks, my uncle and the other primary portfolio manager at Zacks, would go around the table and ask everyone which way they thought the market was headed. Based on whatever was happening in the market that month and the fact that people who worked at an asset management firm were being asked to state where the market was headed, most people wound up agreeing the market was heading in a given direction. Ben, after hearing everyone’s view would then pronounce that the market was headed in the other direction. The whole thing usually elicited a chuckle, but the exercise contained a very important lesson. When everyone believes the market is headed in a given direction that belief is reflected in market prices. As a result the market actually is more likely to head in the opposite direction.

Currently, there is a widespread belief throughout the media and individual investors that the market has come too far for too long. The crashes of ’08 and ’00 loom extremely large in investors’ minds and as a result while bullish sentiment is rising, it is not anywhere near the levels we usually see during a bull-market.

As a result most investors seem to see the market as overdue for a correction. I am not immune to the current zeitgeist. In my quarterly commentary for the first quarter of 2014 I also was looking for a pull-back or market correction. To some extent there is currently too much worry, too much concern about the stock market. Caution has not been thrown to the wind, as soon as speculative social media stocks rally they are immediately brought back down to earth. It is not the behavior we tend to see at the top of the bull market - cab drivers are not talking about owning Netflix ( NFLX) stock and telling me I am crazy for preferring Johnson and Johnson ( JNJ). Basically, too many people in the market are looking for a correction, there is some speculation but not what should be occurring after a five-year bull market.

Surprise: The Market does not pull-back over the next few months but instead the bull-market continues to climb the wall of worry.

[4/6/14 Mitch Zacks] I and many others have been saying this for quite some time, that there will be a correction at some point. The market has experienced drops of 10% or more many, many times and come back to finish the year strong. In market conditions like the one we find ourselves in, it’s always best to remember what ultimately drives share prices. It’s not the weather or a geopolitical crisis that will seem much worse than it actually is at the time it starts, but rather, fundamentals that drive the market.

Don’t base decisions on a quarter-by-quarter basis, or certainly not on a monthly or weekly basis. Focus on the long-term. Look for companies that have the best potential for earnings growth, because when you buy a stock, you are buying part of a company’s future earnings stream and profits.

I know some might say this market looks like it did in 2000, when people just kept buying stocks, driving the markets ever higher. However, now is nothing like then. The fact that investors, pundits and analysts are even talking about a bubble tells me we aren’t in a stock bubble that’s ready to burst. The biggest difference between now and then though, is the fact that back then, valuations were out of control. Anything that even remotely had to do with the internet was being bid up to ridiculous prices even when these companies had no business plan or any foreseeable way of turning a profit. Today, stocks are, for the most part, fairly valued and should the economic growth, and, in turn earnings, begin to grow at an accelerated pace, there is no reason this bull market can’t go on for at least a few more years. I certainly don’t see it ending in 2014.


[3/13/14] Kevin Cook looking at S&P 2500 in two years

[3/9/14] It was five years ago today that the S&P 500 hit bottom when it reached 667 approximately. March 9, 2009 is a day most investors won’t forget. I know I won’t. It marked the end of the second largest financial crisis in the history of our country and in absolute terms, due to the size of the global economy at the time, it can be classified as the biggest financial disaster since early humans began bartering for goods and services.

Bull markets, on average last five years, but that’s just an average. A bull market can be defined as a period where an index gains 20% or more without a decline of 20% or more. The current bull market we are in currently ranks as the 6th longest. We are still a far cry away from the longest bull market in history that started just after the crash in 1987 and ended with the tech bubble in 2000.

So far this bull market has gained 177% as of this writing, that makes it the fourth strongest in history. That’s pretty good when you think back to March 9th, 2009 when otherwise intelligent individuals were so panicked they truly thought the U.S. was going to become a third-world country.

The question is: Can this bull market continue or is it getting a little long in the tooth? My answer is yes, it can certainly continue. Markets don’t follow a calendar. Stocks don’t know if it March 10th, 2009 or March 9, 2014. It’s completely irrelevant. The fact remains, despite some weather-related soft economic data, we are heading for more global growth. Anything lost during the winter will just be pushed out into the Spring and Summer. We are also in an election year which means there is almost zero chance of the government passing anything substantial since many politicians are in campaign mode and don’t want to stick their neck out on anything close to controversy. Earnings have also been beating expectations by a lot. A vast majority of the companies in the S&P 500 beat the consensus.


Additionally, should growth pick up, which most believe it will this year and next, more jobs will be created. People sometimes forget that growth begets jobs, jobs don’t beget growth. It’s an unfortunate, but true fact that the last thing to recover from any recession is employment. I feel as QE3 really starts to wind down, we will begin to see growth pick up and jobs along with it. QE3 has helped sentiment, but that’s about it. It has kept interest rates low and taken away any incentive for banks to lend. If banks aren’t lending the velocity of money falls off a cliff and we don’t really see the intended effect of QE.

At this point, it doesn’t really matter what caused such a large crisis. It happened, the markets have soared to new heights and the global economy is growing. Yes, there are some weak spots, but that can be said of any time period, good and bad. The economy is much more resilient than most give it credit for. Remember, when you own a stock, you own a piece of a company. These companies own hard assets like machine equipment, real estate and patents. The market can never go to zero because eventually people will start buying at very depressed levels and another cycle is born. I believe we’re in the middle of this economic cycle and believe this bull market could turn out to be just as historical as the drop and for the global economy to keep chugging along.

-Mitch Zacks 

[2/4/14] Most investors were not truly worried about the modest -3.6% pullback for stocks in January. It was easy to say this was nothing more than a normal round of profit taking and stocks would soon bounce. 

However, on Monday things got a bit more serious. Why? Because it may no longer be a problem outside the US borders.

Meaning that over the past few years we have heard many investment commentators "cry wolf" over some international concern that in the end did not amount to much... nor really affect the US economy. Unfortunately on Monday we got much weaker than expected manufacturing data from the monthly ISM report. It came in at 51.3 versus a consensus estimate of 56.0.

Reity, are you worried?

Not really. But I under stand why others are concerned as it brings the problems closer to home. Thus it pays to be a touch more defensive now until the bull rally resumes (which is why my Reitmeister Trade Alert portfolio is only about 60% long the stock market and making money on volatility ETF).

My guess is that we now test the 200 day moving average down around 1706. That drop will scare most investors into a capitulation which often marks bottom. Meaning if we get down there, then scoop up stocks with both hands... and feet.


[1/5/14] Almost every calendar year brings with it shocks that could temporarily cause the market to correct or even reach full-blown bear market territory. Some things are just unforeseeable. But even with the problems that could arise, I’m still very optimistic for 2014. Growth should pick up, which in turn should help earnings, unemployment and stocks prices. We have too many tail winds for 2014 not to be another good year in the economy and stock market. Yes, there will probably be surprises along the way and we could see that correction that never came in 2013, but our economy is strong enough to handle some relatively small events. Remember, investing is always going to be two steps forward and one step back. We took a few steps forward in 2013 so expect more volatility but ultimately, when it’s all said and done, we should be ringing in a happy new year next year as well. [Mitch Zacks]

[1/3/14] No matter how you slice it, 2013 was a terrific year for stock investors. The +32% return for the S&P 500 was the third best showing since 1970. However, this success breeds two very different responses from investors as they look out at the new year.

1) Elation that the good times will continue.

Vs.

2) Fear that it has been too good and now we are due for a fall.

In this article I will review the investment landscape for the year ahead. This will include a target price for the S&P 500 along with some potential pitfalls.

The economic picture continues to improve as GDP growth is accelerating from the previous Muddle Through pace of just 1-2% growth. So right now there is no threat of a recession, which is Public Enemy #1 for stocks.

The main issue at this stage revolves around valuation. Those who point to a historical average PE of 15 say the market is fully valued at this time given expected S&P 500 earnings per share of $120 this year.

This is a short-sighted view. First, that 15 average PE concept goes back too far in time when investors did not properly appreciate the risk/reward relationship of stocks versus bonds. Since then 16-17 PE has been more the norm.

Second, a maturing bull market will always have higher valuations than average. That is the difference between fair value and fully valued.

Third, valuation is also about the attractiveness of stocks versus other investment alternatives. Cash continues to be trash with ultra-low interest rates. Bond funds are losing money as rates go higher. Real estate has stalled out (also thanks to higher rates). Gold is going nowhere. And please let's not waste our time talking about bitcoins.

Add it all up and this points to another year of gains for stocks.

The S&P is up 53% the past two years and +177% since March 2009. Thus, the easy money has been made and we should not expect such robust returns in 2014.

More likely stocks will provide a more modest gain of +8 to 10%. That would create a target range of 2000 to 2040 on the S&P, which is a fully valued market around 17 times current year earnings estimates.

Friday, December 19, 2014

compound interest

Tony Robbins, in an interview with Warren Buffett, asked his secret to wealth. Buffett replied, “No. 1, it’s being born in America. No. 2 is good genes, so I live long enough. And No. 3, it’s compound interest. Compound interest — people have no idea the power that it really has.”

The best time to invest may have been in the past, but the second-best time to invest is today! Everyone, regardless of income, can take advantage of the power of compound interest. Einstein called it the “Eighth Wonder of the World.” Compound interest is the interest you earn on the initial amount you invested and the interest you already earned. It is basically “interest on interest.” The growth becomes exponential the more time you have.

Of Buffett’s $63 billion net worth, approximately $60 billion came after his 50th birthday, and $57 billion after his 60th. While you can always work to get more money, invest wisely to get a higher return — you can never get more time. Since the power of compound interest comes from time, you need to get started as soon as possible.

Friday, December 12, 2014

How not to invest

I thought I posted this before but I can't find it, so I'll post it again (assuming I posted it the first time).

What we are about to present is one of the most shared and coveted charts on StockTwits.

It shows the mistakes that traders and investors of all skill levels can make.

Two of the greatest attributes any market participant can have are discipline and a plan of action. Without either of those you may find yourself subject to a vicious journey like this:


[via roy]

Sunday, December 07, 2014

The CAPE ratio

The CAPE ratio is currently around 27, which makes the following fact all the more worrisome: Before this year, the CAPE ratio has been higher than 25 in only three periods – the years clustered around 1929, 1999, and 2007.

You don't have to be a stock market historian to know what those years featured – market peaks followed by big bear markets. When framed that way, it seems that a CAPE ratio above 25 should be an automatic warning sign.

But that's only half the story. A closer look at the data shows that the market can do quite well even when CAPE ratios exceed 25:

Year
CAPE Ratio (on January 1)
S&P 500 Return
1997
28.33
+31.01%
1998
32.86
+26.67%
1999
40.57
+19.53%
2004
27.66
+8.99%
2005
26.59
+3%
2006
26.47
+13.62%
2007
27.21
+3.55%

Shiller himself admits the limitations of CAPE as a forecasting tool, in his article he plainly states that "the ratio has been a very imprecise indicator" and that it was "never intended to indicate when exactly to buy and sell."

With the CAPE ratio hovering around 27 now, it's certainly not something to completely ignore. But we also know that stocks can remain "overvalued" for several years before reverting to the mean.

-- ZIM Weekly Update, 12/7/14

Thursday, December 04, 2014

Connor Bruggemann

It was just a few weeks into the new school year when Connor Bruggemann decided to play sick. He holed up in his bedroom, shut the door, and opened his laptop. Over the summer his father had opened an Etrade account for him, using around $10,000 Bruggemann had saved up over two years working as a busboy and waiter at a local BBQ joint.

At first Bruggemann had used that cash to buy some big, well-known stocks: Apple, Verizon, and a few others. But today was different. One by one he liquidated those positions and put almost everything he had into American Community Development Group Inc, ticker sign ACYD, a penny stock selling for $.003 a share.

Over the next year Bruggemann would turn that $10,000 into more than $300,000, principally trading penny stocks, a practice rife with risk, fraud, and wild swings of fortune. He took off school that day, but for most of the time when Bruggemann was trading, he was also a 16-year-old high school junior in Wyckoff, New Jersey. With his iPhone in hand, Bruggemann would buy and sell six figures of stock from his lunch table, the bathroom, and, occasionally, on the sly while sitting at his desk.

ACYD was Bruggemann’s first big trade. It’s a manufacturer of industrial grade wireless equipment for municipal Wi-Fi systems. He had listened to a conference call where the CEO announced it would buy back shares of the company to try and spur the price towards 1 cent a share. Four days later, Bruggemann accumulated a position of several million shares at the price of roughly one-third of a penny each. Four days after that, the company officially announced its share buyback program, and the price began to climb.

By the end of September those shares had reached a price of a little over a penny each, and Bruggemann’s portfolio was worth more than $50,000. By October, the price of ACYD shares had risen to around 6 cents, 20 times what Bruggemann paid for them. His portfolio was suddenly worth just under $200,000. He sold off most of that position by the end of the December, by which time the stock was down to 4 cents.

By March, ACYD was down to a penny, and today it sits at $.0036 a share, almost exactly where it was when Bruggemann got started. It’s a reminder to him that trading such volatile stocks is a dangerous game.

"I guess the rule of thumb is, when you invest in a penny stock, expect to lose every dollar you put in. So there is always that risk," he told me. "There have been several times where I put every dollar I’ve had on the line, and fortunately it's worked out almost every time." He stops, then corrects himself. "Every time! Or else I’d have nothing."

[via facebook]

Saturday, November 29, 2014

humans finally defeat monkeys!

The New York Times on Friday ran an article on how investors sabotage their long-term goals by making decisions based on short-term results. It carried a quote by Suzanne Duncan, global head of research at State Street’s Center for Applied Research: "Morningstar gives us false comfort," she said. "There's some truth to Morningstar's ratings. But there is untruth. Dart-throwing monkeys outperform market-cap-weighted indices."

All right, that passage requires some explaining.

That final sentence certainly does. If dart-tossing monkeys can reliably beat a stock market index, then monkeys would seem to have investment skill--and surely are worth the cost of zookeepers, cages, and bananas to employ as portfolio managers. The catch is in the adjective "market-cap-weighted." As Research Affiliates' Rob Arnott (presumably the original source of the quote) has argued, if small and value stocks outperform over time, as they have done historically, then any random stock-selection system would have a higher expected return than the S&P 500. This holds true regardless of the primate.

Thus, the monkey analogy does not support Duncan's previous sentences, which concern the usefulness of fund research. Rather, it argues that equal-weighted portfolios will outperform those that are cap-weighted.

Conventionally, the mutual fund industry's performance is equal-weighted. Morningstar.com tells me today that specialty health care has the highest returns of any fund category over the past three years, at 31.02% annually. That result was calculated by averaging the totals for each specialty health-care fund over that time period, counting the whales and minnows equally.

Asset weighting, on the other hand, goes where the money is; if a single whale outweighs all the minnows, then that whale’s numbers count for more than those of all the minnows combined. Thus, asset weighting indicates how investors have fared at fund selection. If funds’ asset-weighted gains are larger than their equal-weighted gains, the big funds have beaten the small, indicating that investors have selected wisely. If the figures are similar, investors did neither worse nor better. And if the equal-weighted performance is higher, then investors were dumber than monkeys. They would have been better off growing bananas than conducting fund research.

The asset-weighted figures for the past 12 months--



The story looks pretty good for investors. However, the numbers contain a lot of noise.

Things settle considerably when looking at a full decade--



Once again, investors fare pretty well. For sure, these results should not be considered conclusive. All fund research is time-period dependent. Sample another decade and the pattern may look weaker or possibly disappear altogether. Nonetheless, at least for the past 10 years, humans have comfortably bested the monkeys.

***

To check, I looked at RSP which is the equal-weighted S&P 500.  For one year, it has returned 17.02% to the S&P 500's 16.86%.  For ten years, it returned 9.37% to 8.06%.  Monkeys win.

Friday, November 28, 2014

the current bull market

It has been five years and seven months since the S&P 500 Index hit a dreadful low of 666.79 (intra-day) in the midst of the full force of the financial crisis. This August, the index passed the 2,000 mark for the first time in history, three times above the low of the crisis, retreating slightly at the end of September. Certainly, much has changed in the U.S. economic and business environment to trigger that impressive growth (a total return of 191.53%, or 228.05% including dividends). And certainly today we live in a healthier economy with improving fundamentals, along with restored consumer and investor confidence.

Reading the news and listening to investors, it seems that to many, five years and seven months of a strong market is too much of a good thing. In recent months there’s been a lot of commentary suggesting that stocks have appreciated “too much” for too long and are now overvalued. Pundits have exclaimed that the stock market has exhausted its growth potential, and that we are at the peak of the bull market and due for a correction. Others disagree, believing that the markets still have room to appreciate, supported by a not-too-hot/not-too-cold economy, even with the much-anticipated rise in interest rates at some point in 2015.

Five years seven months and a 192% return is indeed an impressive run, but it is merely average when compared to historical bull markets. The table below lists all bull markets since 1871 and ranks them by duration. We define bull markets as those with at least a 20% increase that lasted six months or more. The return magnitude of the current bull market is slightly above average and is sixth, as measured by duration. The current bull market does not come close to two of the largest bull markets, both of which ended with speculative stock bubbles: one the dot-com bubble, and the other the Great Depression. These impressive runs also had short-term event-driven corrections. The longest bull market experienced three of them, ranging from -33% to -19%: Black Monday in 1987, the Iraq war in the early 1990's, and the collapse of LTCM in 1997.

Bull Markets Since 1871
Includes all increases in the S&P 500 Index of 20% or more

that lasted at least 6 months

Start          End          months Rank  Return Rank
13-Aug-1982    27-Mar-2000   211.4   1 1387.85%  1
July 1949      12-Dec-1961   149.4   2  419.97%  2
September 1921 September 1929 97.0   3  385.27%  3
4-Oct-1974     28-Nov-1980    73.8   4  125.63%  9
September 1896 September 1902 73.0   5  132.28%  8
10-Mar-2009    30-Sep-2014    66.7   6  191.53%  4
24-Jul-2002    9-Oct-2007     62.5   7   96.21% 11
May 1942       May 1946       49.0   8  138.52%  6
July 1877      June 1881      48.0   9  141.03%  5
27-Jun-1962    9-Feb-1966     43.5  10   79.78% 12
November 1903  September 1906 35.0  11   60.22% 15
27-May-1970    11-Jan-1973    31.5  12   73.53% 13
February 1885  May 1887       28.0  13   39.15% 18
10-Oct-1966    29-Nov-1968    25.7  14   48.05% 16
December 1907  December 1909  25.0  15   64.80% 14
April 1935     February 1937  23.0  16  115.34% 10
January 1915   November 1916  23.0  16   38.91% 19
July 1932      February 1934  20.0  18  137.32%  7
January 1918   July 1919      19.0  19   39.85% 17
May 1938       November 1938   7.0  20   32.15% 20
AVERAGE                       55.6      187.37%


[Well, being ranked 6 and 4, I'd say that's above average.  And it also appears to be above average on a percentage gain per month basis -- about 2.9% per month.]

We think the current bull market has more room to run, but we do not expect the stellar 30%+ return from 2013 to repeat this year or next. We believe that conditions are in place to sustain attractive growth rates in the companies in which we invest and attractive returns in their stock prices. In our view, current levels of widely-used valuation metrics support our thesis. Valuations are at or moderately above their 100-year average, and there are plenty of good stocks at attractive prices to be found, in our opinion.

Current valuations also imply significant forward long-term returns, particularly for growth stocks. We looked at the historical relationship between stock valuations and future returns and plotted the results in
the following charts. While this analysis is not proof of cause and effect between P/Es and future returns, it reveals a pattern that suggests such a relationship – low valuations correspond to higher five-year future returns.

The result from this analysis suggests attractive stock returns over the next five years, with growth stocks being in a stronger position. At current valuations, the analysis shows that the implied forward rate of return for growth stocks is 11.7% over the next five years, while value stocks’ implied rate is 8.5%, although there is no guarantee this will be the case.

Timing the Market Would be an Amateur’s Mistake That Can be Very Costly

Investors appear to be anxious, as demonstrated by the negative year-to-date flows out of domestic equity mutual funds and ETFs. This may prove to be an over-reaction by investors, as well as a costly mistake.

The Patriots lost 41-14 to the Chiefs in week four and had a 2-2 record. The result was a lot of noise about whether the team should bench 37-year old Tom Brady. Many were ready to have him hang up his cleats. Other factors, of course, could have been responsible for the slow start, such as the offensive line or inexperienced receivers. An experienced coach like Bill Belichick didn’t waiver in his support of his seasoned quarterback. Week five saw the Patriots face the Bengals, a team that entered the game 4-0. Brady threw for 292 yards and beat the Bengals resoundingly, 43-17. Tom Brady is not done yet – there are still more successes to be achieved in an already successful career (in week five he became the sixth quarterback to have over-50,000 career passing yards).

Over-reacting to short-term issues, trying to time the equity markets, or abandoning the equity markets entirely, should not, in our opinion, be part of an investor’s game plan. It certainly seems safer to put your money in a bank account. Consider, however, what you earn from a one-year bank CD (around 1%) and factor in the consequences of inflation (currently around 1.7%, as measured by the Consumer Price Index), and you are left with a negative return.

Following what everyone else does in the equity markets will often result in selling after the market has gone down or buying after the market has gone up. Instead, it forces investors to participate in the downside and keeps them from participating on the upside, which is not a particularly successful strategy.

Linda S. Martinson
Chairman, President and COO
October 20, 2014

pari-mutual betting

I had dinner last night by absolute accident with the president of Santa Anita. He says that there are two or three betters who have a credit arrangement with them, now that they have off-track betting, who are actually beating the house. They’re sending money out net after the full handle – a lot of it to Las Vegas, by the way – to people who are actually winning slightly, net, after paying the full handle. They’re that shrewd about something with as much unpredictability as horse racing.

"And the one thing that all those winning betters in the whole history of people who’ve beaten the pari-mutuel system have is quite simple. They bet very seldom.

"It’s not given to human beings to have such talent that they can just know everything about everything all the time. But it is given to human beings who work hard at it – who look and sift the world for a mispriced be – that they can occasionally find one.

"And the wise ones bet heavily when the world offers them that opportunity. They bet big when they have the odds. And the rest of the time, they don’t. It’s just that simple.

"That is a very simple concept. And to me it’s obviously right – based on experience not only from the pari-mutuel system, but everywhere else.

"And yet, in investment management, practically nobody operates that way..."

From "A lesson on elementary, wordly windsdom as it relates to investment management & Business" by Charles Munger , USC Business School , 1994.

Tuesday, November 25, 2014

stocks to hold for the next 10 years

Finding the best stocks to buy for the next 10 years probably isn’t on most folks’ radar these days. After all, the market is making new all-time highs seemingly every other day and is poised to deliver more-than-solid returns in 2014.

However, long-term investors know that the key to successful investing is to ignore day-to-day and year-to-year market moves and focus on longer periods when hunting down the best stocks to buy.

After all, stocks get bounced around by all sorts of issues outside a company’s control, from geopolitical crises to recession overseas. What really separates good investments from the bad and the ugly is how a stock performs over a decade or more. A well-managed company in the right industry will prove itself over time. Just ask Warren Buffett, whose preferred holding period is “forever.”

As we head into the end of 2014, it’s a perfect time to look at the best stocks to buy for the long haul. These are names that will benefit from powerful secular trends, as well as their own strengths within their respective industries. Hey, buy-and-hold can indeed work if you’re patient. Look at a long-term chart of the stock market and you’ll see that despite some painful crashes, the line always moves up as it moves to the right.

If you can remain patient for a decade or more, look to this list of the 10 best stocks to buy for the next 10 years (and beyond):

[I agree with the premise, but I don't necessarily agree with the stocks.  It is interesting to note that the author owns none of the stocks he mentioned.]

shades of 1928?

The uptrend out of the October 15 low just can’t be stopped. On Monday, amid light volumes ahead of the Thanksgiving holiday, the S&P 500 notched another record high by climbing 0.3% to close above its five-day moving average for the 27th consecutive session.

That’s the longest such winning streak since March 1928, which marked the start of the great 1929 stock market rally that, when it crashed back to earth, was the genesis of the Great Depression.

Sunday, November 23, 2014

Living Legends 2

Today, we’re going to take a quick look at four legendary investors nearing the end of storied careers.  I don’t expect any of these gentlemen to retire, per se.  In fact, I would expect all to die in the saddle with their boots on, God willing.  But when these investing legends do eventually leave for that great boardroom in the sky, they will be missed by generations of investors that learned the trade from watching them operate.

Any list of living legends has to start with Warren Buffett.  I hope the Oracle of Omaha lives forever, if for no other reason than I appreciate his wit.  When asked what his plans were after becoming the world’s wealthiest man, his deadpan reply was “to become the oldest.”

Buffett admitted to CNBC’s Becky Quick that buying Berkshire Hathaway was the worst trade of his career, yet he’s managed to do quite well, all things considered.   Buffett has compounded Berkshire Hathaway’s book value at an astonishing 17.9% annualized return over the past 30 years, beating the S&P 500 by 6.8% per year.  Again, that’s over a period of 30 years.

Next on the list is Marty Whitman, founder of Third Avenue Management and lead portfolio manager of the Third Avenue Value Fund (TAVFX) for most of its history.  Like Buffett, Whitman is a noted value investor, though he tends to focus more on “deep value” special situations.   And like Buffett, Whitman has been around for a while; he’s worked in the investment management business for more than 50 years.

Whitman retired from full-time management of the Third Avenue Value Fund in 2012, though he remains active in his company and as opinionated as ever. His letters to investors are as entertaining as they are insightful; if you are a student of finance, I recommend you spend a few days browsing them (see letter archive).

My enduring memory of the 78-year-old Carl Icahn will always be his manhandling of fellow activist investor Bill Ackman live on CNBC over Ackman’s Herbalife (HLF) short.  At one point, Icahn called Ackman a schoolyard crybaby.

Icahn isn’t the warm, grandfatherly type like Warren Buffett.  He’s kind of a mean old man, to be honest.  But he’s a hard-nosed, no-nonsense investor with a reputation for fixing broken companies. He’s also a natural contrarian. In his own words, “The consensus thinking is generally wrong. If you go with a trend, the momentum always falls apart on you. So I buy companies that are not glamorous and usually out of favor. It is even better if the whole industry is out of favor.”

Irving Kahn has seen it all.  At 108 years old, his career predates the Great Depression.  In fact, he made his first trade—a short sale of a copper mining company—in the summer of 1929, was just months before the Great Crash.  Like Warren Buffett, Kahn studied under Benjamin Graham, the father of value investing as a discipline.  He was also one of the first professionals to earn the CFA designation.

If I am lucky enough to still be alive at 108, I probably won’t still be running money.  Frankly, it’s a stressful job.  The fact that Kahn is still actively managing portfolios is testament both to incredible genes and to the emotional detachment he brings to his value investing methodology.

Per the Kahn Bother’s website,

Kahn Brothers thinks of a portfolio as an orchard of fruit trees. One cannot expect fruit every year from each species of tree. Investments can and often do have varied and unpredictable timetables to maturity. We believe a suitable time horizon for investment fruit to ripen for harvest can be three to five years or longer. Indeed, a key factor in realizing outstanding performance is having the discipline and patience to maintain time-tested principles and not abandon the orchard before the fruit has ripened.

At 108 years old, Kahn has no doubt learned a thing or two about patience.

And finally, we come to the granddaddy of macro hedge fund traders, George Soros.

Soros’ investment returns were the stuff of legend.  In its heyday between 1969 and 2000, Soros’ Quantum Fund generated annual returns in excess of 20% per year.

Soros will be forever remembered as the man who broke the Bank of England—and as the man who pocketed nearly $2 billion in a single day shorting the pound.

[so I count five, not four.  I guess that's what the headline of the article counted too.]

Saturday, November 22, 2014

Ken Cramer

Jim Cramer's father passes away at 92

Cramer talks about his father on Mad Money and on The Street

Friday, November 21, 2014

Robert Reich's presidential candidate

I asked Reich what kind of presidential candidate he was looking for in 2016.

“In general terms we need candidates who clearly and truthfully assess what has happened to the middle class and the poor,” he said. “Unless more of the gains are shared, the economy will not work. It will become so top-heavy that it can’t sustain itself because there will not be enough purchasing power in the middle class and among the poor. We need candidates to be bold and specific as to what needs to be done.”

He is not overly optimistic this will happen, however. Both Democrats and Republicans, he says, go “hat in hand” to wealthy corporations and individuals to raise money either to launch attack ads or defend themselves against attack ads.

And, as the old adage goes, he who pays the piper calls the tune. It is hard to attack a system that favors the super-rich if the super-rich are funding your campaign.

-- Roger Simon, Politico

Monday, November 17, 2014

Bernanke on inflation

He also fought back against those who have railed at the supposed-inflation implications of a now-$4.5 trillion Fed balance sheet courtesy of three rounds of QE. He recalled thinking, “we were never concerned about [inflation]; that was just bad economics; inflation was never a risk and is not a risk now…inflation is non-existent and we’re adding 200,000 jobs a month to the economy.  Four years later there’s not a sign of inflation. The dollar is strengthening. They’re saying, ‘Wait another five years, it’s going to happen.’ It’s not going to happen.“

-- Liz Ann Sonders, Schwab Investing Insights

Tuesday, November 11, 2014

Anton Ivanov

Anton Ivanov isn’t your average millionaire.

For starters, he’s barely 27 years old, he doesn’t work in Silicon Valley and he isn’t heir to a family fortune. He doesn’t live in a tiny house or get his food from a compost garden in his backyard, either.

Ivanov, who shares wealth-building tips on his blog, Financessful.com, made his million the old-fashioned way: He read books. He saved early and often. And he started planning his rise to millionaire status before most kids his age had their driver’s license.

“I’m a testament that if you want something bad enough and you keep working towards it ... you will get to where you want to go,” he says. "It was my habits and my principles that made me rich."

“In high school, there was pretty much no financial education and my parents wouldn’t talk to me about money,” he says. “Everything I learned about money I had to learn myself.”

He devoured books on wealth building. An early favorite was “Think and Grow Rich,” the 1937 classic by Napoleon Hill, which details strategies that can be used to overcome psychological barriers to wealth.

“That book was extremely influential,” Ivanov says. “It wasn’t a ‘how to get rich’ book but it gave me a vision and a mental system that I could use to achieve pretty much anything I wanted.”

At age 16, he had one goal in mind: become a millionaire.

College or career? 

While his friends signed up for college classes, Ivanov celebrated his 18th birthday by opening his first Roth IRA. After spending some time working (mostly administrative jobs near home), he decided to enlist in the U.S. Navy at age 20. He earned about $55,000 a year as an electronics technician and took distance learning classes to earn a Bachelor’s degree in information technology and programming. Uncle Sam picked up the tab for his tuition and fees.

“When I compared [going to college] to joining the military, the latter seemed like a smarter idea because I would be earning income right away instead of waiting until I graduated,” he says. “And I could receive an education pretty much completely free, which I did.”

The ‘lazy’ investor

After Ivanov maxed out his Roth IRA (the annual contribution limit is $5,500), he opened up a small brokerage account with TradeKing. Years of careful research convinced him stock-picking wasn’t for him. His investing strategy was simple: focus on low-cost stock mutual funds that covered a variety of major asset classes and let the market do its job.

“It’s what I would call a lazy portfolio,” he says. After doing research, Ivanov decided to invest in seven asset classes: domestic, large-, mid-, and small-cap funds, emerging market funds, commodity funds, with a small chunk in bonds. Then he let it ride. He rebalances his portfolio once a year, if at all.

A couple of years into his stint with the Navy, Ivanov faced his first true test as an amateur investor. By saving 60% of his Navy income and taking on freelance jobs on the side, he had been investing somewhere between $40,000 to $45,000 per year when the financial crisis hit in 2008.

He says he lost “a good amount,” but when the market sank he didn’t sell like many other investors did. “I powered through and when the market hit bottom, that’s when I tried to save and invest even more. To me, it was a no brainer,” he says.

Getting into the real estate game

Heavily influenced by books like “The Millionaire Real Estate Investor” and “The Millionaire Next Door,” Ivanov knew he wanted to start investing in real estate. His timing couldn’t have been better. The bust had essentially turned the housing market into the world’s biggest bargain bin.

In 2009, Ivanov put down $80,000 on a $400,000 condominium in San Diego, which he rents out for a $36,000 a year (he nets about $12,000 a year after making his mortgage payments). Today he estimates the property’s value is well over $600,000. 

Since then, Ivanov has added another property to his nascent housing empire. He purchased a $430,000 duplex earlier this year. He collects $21,000 a year in rent ($12,000 net after his mortgage is covered) renting out one of the apartments, while he and his fiancee live in the other.

“I believe in taking smart risks,” he says. “If you see an opportunity and you think it’s a good opportunity, you should take it and understand that you may be wrong and understand what the repercussions may be.”

He hopes to own at least 10 properties by the time he hits his 40s, but he’s in no rush. Once his housing expenses are taken care of, he puts all of his income — from his rental properties, his job and his freelance work — first into his retirement account, emergency savings account, and then into his taxable brokerage account. Once those goals are met, he contributes to a separate high-yield savings account, which he sets aside for future real estate purchases. You can see a full breakdown of Invanov's assets here, or check out the graphic below.

Ivanov crossed the $1 million net worth mark just two months shy of his 27th birthday in June this year. He was thrilled to finally reach this milestone — but not surprised.  

“If you have a really strong desire in your head, you can power through any obstacle you may face,” he says. “I truly believed that when I was 16 and I believe it now.

Monday, November 03, 2014

How to pick SMART Stocks

A well-balanced stock portfolio should consist of, at a minimum, 15-20 stocks in seven or more different industries so you are diversified. You want to use both technical and fundamental analysis to find financially strong companies with above-average growth.

Interestingly, out of the 8,800 stocks in the U.S., there are only about 250 stocks that fit this description. Since you want to hold stocks for the long term, it is important to choose the right ones. Steve Connell, former partner with The Capital Group and now CEO of Interlaced Advisors, states, “Being successful in the stock market … requires patience while riding the right horse. The stock market by nature undervalues opportunities that last more than a few years.”

Here are some more tips:

* Choose Companies You Understand. Warren Buffett is arguably the world’s greatest investor. One of his top rules is to only invest in what you understand. You want to pretend as though you are personally buying the company and have to run it. If you understand the business, you have a better chance of seeing opportunities and problems before they come up. This will help give you a leg up when investing. If you don’t understand the business, how it makes money, or it’s one that is too complex, then it becomes difficult to predict future cash flow, performance and growth of the company. To quote Buffett, “I try to buy stock in businesses that are so wonderful that an idiot can run them because, sooner or later, one will.”

* Look For Diversified And Recurring Revenue. Some companies go through periods of high sales growth followed by periods of no growth. You want to find a stock where there is diversified and repeatable sources of revenue. This way their income is more predictable with additional ways to make money. Also check to see how many clients or customers a company has. If a company is solely reliant on very few clients, it will hurt revenue if one of them leaves.

* Be Disciplined And Patient! Fidelity Investments analyzed the performance of their accounts and found that the clients who performed the best were the ones who either died or forgot they had an account! This is because emotions can be our greatest enemy, and we tend to make trades at the wrong time. Connell looks for companies that “improve the human lot more than any others for the indefinite future, they know how to capture the value they create, and the stock prices do not yet reflect the long and fruitful future that lies ahead of them. There are very few other investment opportunities like this in the stock market.”

-- David Chang, Thinking Smart, Midweek, October 15, 2014

Sunday, November 02, 2014

QE ends ... and QE begins

In response to the growing concern about European weakness, the European Central Bank took action earlier in the month by buying bonds which essentially implemented quantitative easing. This will cause European interest rates to fall, and that in turn puts downward pressure on the Euro relative to other currencies including the Japanese Yen.

Now, if you are Japan and looking to export some Hondas, the last thing you need to happen is for the Euro to depreciate relative to the Yen. In order to prevent this, the Japanese Central Bank put on their Godzilla costume for Halloween and joined the fray with an unanticipated round of bond buying.

Effectively, the Central Bank of Japan is going to buy on the open market more than double the amount of new bonds issued by the Japanese Government. This level of stimulus makes the Federal Reserve's latest round of quantitative easing which ended this month look timid by comparison.

So effectively, the weakness in Europe caused the European Central Bank to push interest rates down. Japan, not wanting their currency to appreciate, responded by pushing their interest rates even lower.

Excellent news for stocks.

I don't know if this is going to help sell more Mercedes or Hondas, but I do know that the net result of the race to depreciate currency is to pull global interest rates much lower for much longer than investors are anticipating. This is a positive development for stocks and most other financial assets over the next few quarters.

-- Mitch Zacks, ZIM Weekly Update

Saturday, November 01, 2014

Oxfam America on inequality

Extreme inequality and poverty
Hardworking people can't get ahead when the rules are set against them.

What's wrong
The rigged rules of our economic and political system hold our economy back and make it tough for hardworking people to get ahead. Extreme inequality destabilizes global economies and pushes more and more people into poverty.

Making it right
Practical, smart reforms can level the playing field: Closing tax loopholes; increasing the federal minimum wage; using oil, gas, and mineral revenues responsibly; and ensuring the voices of hardworking people are not drowned out by special interests will all help reduce inequality.

Thursday, October 30, 2014

Fed ends QE

The Federal Reserve ended its historic easing program Wednesday, ceasing the final $15 billion of monthly bond purchases it had made in an effort to keep the economic recovery going, in a statement that kindled market talk about a more hawkish central bank.

Though it ended the program, the Federal Open Market Committee kept the "considerable period of time" language that investors had considered crucial in the central bank's map for when it would raise interest rates. The "considerable" time refers to when the Fed will begin raising rates after the end of the monthly bond buying.

To that end, it said it would keep its short-term target funds rate anchored near zero until it sees more improvement from the economy.

But it also noted significant economic gains, expressed some doubt that low inflation would continue and struck a tone that some anticipated as a tip toward those on the committee who advocated the Fed start to consider tightening policy.

After some meandering stocks ultimately sold off after the statement. Interest rates moved higher as did the U.S. dollar.

[via facebook]

Monday, October 27, 2014

millionaires on inequality

Most millionaires are concerned about inequality, and nearly half support a higher minimum wage and more taxes on the rich, according to a new survey.

The survey, from PNC Wealth Management, found that 64 percent of millionaires are "concerned" about economic inequality in America, and about half of those millionaires are "extremely concerned."

Yet millionaires see themselves as part of the solution to inequality rather than a cause.

Fully 49 percent support raising the minimum wage, compared with 38 percent who oppose an increase. A surprising 44 percent of them support raising taxes "on the top income earners," versus 41 percent who oppose.

And when it comes to other solutions, 69 percent say they support charities focused on poverty and hunger in the U.S., while 64 percent said they support scholarship and other educational opportunities for low-income children.

"These findings show the wealthy realize that our society is better when everyone is in the game and earning—and that economic inequality can have negative consequences," said Thomas P. Melcher, executive vice president and head of Hawthorn, PNC's family office.

Friday, October 17, 2014

Carter Worth says sell the bounce

[10/17/14] The market has bounced 33% off the low and is hitting resistance.  Sell.

[10/15/14] After a 7 percent drop from the highs, has the S&P 500 bottomed out? The answer may be impossible to know for sure, but historical analysis suggests that stocks may have a bit further to fall.

Carter Worth of Sterne Agee looked back on all the market's corrections of 5 percent or more going back to 1927, in order to get a sense of how long they tend to last, in terms of both time and magnitude. He learned that the average (mean) correction is 12.2 percent, and lasts for 41 sessions. The median correction, which is shallower because it is less affected by outliers, is 8.2 percentage points deep and lasts 22 sessions.

Given that the S&P closed Tuesday just over 7 percent off its highs, Worth takes this information as an indication that there will be more to this selloff.

***

The above analysis seems statistically sloppy because you're skewing the sample.  What if you look at corrections over 4%?  Or over 3%?  Or 2%?  Etc.  The average would always be greater than any cutoff you choose.  No great revelation.

At any point, you would have an average correction greater than your cutoff and so you would always be saying sell.  In other words, the opposite of what you should do (buy low).