Monday, March 10, 2014

7 red flags

Remember March 4, 2014 -- a day that will go down in Wall Street history as the beginning of the end for this latest bull market, which is celebrating its fifth birthday.

On March 4, the Dow Jones Industrial Average ($INDU -0.21%) rose 227 points based on a report that Russian troops were pulling back from Ukraine's border. This "news" lit the market on fire, a sign that the market is heading into a mania stage where it doesn't take much to boost stocks.

Indeed, nowadays instead of the "Nifty Fifty" stocks that defined the late 1960s market, we have the likes of Facebook (FB +3.19%), Tesla Motors (TSLA -2.99%), and Chipotle Mexican Grill (CMG -0.92%) -- the new new things.

Can the market go higher? Sure, although the higher it goes, the more dangerous it becomes. Often, during the latter stages of a bull market, the market separates itself from reality and appears to be on another planet.

Such red flags are everywhere:

1. Retail investors have been pouring money into stock mutual funds. The fear of missing out on the sixth year of a bull market has created something close to a buying panic. Although not as maniacal as we saw in 1999, the stock cheerleaders are back and rooting for their stocks and mutual funds to go higher -- just like they always do before a crash or bear market.

2. The Investor's Intelligence survey is concerning. The closely watched II survey shows a low proportion of bears (less than 20 percent), which some have pointed out is the lowest proportion since just before the 1987 crash.

3. Sentiment indicators are pessimistic. The VIX volatility index, the put-call ratio and other major sentiment indicators suggest that investors and traders are getting complacent. Apparently, market participants believe that the Fed, or their fund manager, will protect them in a worst-case scenario.

4. Fundamentals are being ignored. Obscenely high price-to-earnings (P/E) ratios are passed over, along with soft economic readings (i.e. GDP and ISM). When the fundamentals are weaker than expected, the weather is blamed.

5. The stock market crash of 2008 has been forgotten. Investors forget, but the market never does. Those who do not heed the lessons of the past will once again learn a painful lesson.

6. The Nasdaq is soaring. The three-year chart of the Nasdaq ($COMPX -0.04%) has gone nearly parabolic, hitting a 14-year high of 4,351 on March 4. It's the Go-Go years all over again. (And that late 1960s bull market ended with the 1973-74 bear market.)

7. Fear and greed are taking over. When the market reaches the tipping point (and we're getting closer), investors and traders buy "ATM" (anything that moves). The fear of missing out causes a buying panic.

What to do now
There have been numerous crash predictions over the last five years. As a result, many investors have closed their ears, and who can blame them? The market has ignored the warnings and continued to go up. One thing about crashes: They can't be predicted (but it won't stop people from trying). However, it is possible to recognize a dangerous market, which is what we have now.

The market is wearing no clothes

Just like the emperor, the market is wearing no clothes. Right now, many people see only what they want to believe. It's been a long time since investors felt full-throated fear, and many have forgotten what it feels like. The panic to buy will be replaced by the urgency to get out at any price. No one can know what will cause perceptions to change, but they will.

At the moment, emerging markets are in deep trouble, and what is happening in Ukraine didn't help. Nevertheless, the CEOs of several major brokerage firms have urged investors to "go long" emerging markets because they are so "cheap." Once again, these well-educated salesmen are wrong. Emerging markets will recover one day, but not soon. Urging investors to buy on the dip is disgraceful.

Sit and wait?
If we are in the mini-mania stage of the bull market, the market will continue to go higher based on rumors, hope, and greed. Sitting on the sidelines and waiting for the bull market to top out takes tremendous discipline. Trying to capture that final 5 percent can be costly if you get the timing wrong (and most people do). Be prepared for increased volatility as we get closer to the end.

Of course, it's not easy to sit on the sidelines when everyone else seems to be making money. Although many investors are dreaming of another 30 percent return this year, the odds are good that it will be a difficult year. Yes, during a mania stage anything is possible, but with each passing week, the clock is ticking.

Those who have studied market history have seen this story before, and the ending is always the same. No matter how many warnings you give, no many how you urge people to avoid buying the speculative Go-Go stocks and move to the sidelines, few listen until it is too late.

[on the other hand, Here's how the S&P 500 gets to 2,600 next year]

The S&P 500 is currently at 1877.  We'll see how much it goes up from here before tanking (who knows when)?

***

Some comments:

David Strait The market will go down eventually but believing your prediction is no different than believing others who say it's going to continue to go up. If you say the same thing long enough if will eventually come true. The one thing I find is that there is no where else to put your money and get any kind of return so if you keep it on the sidelines you are losing money already anyway.    

Smeado Trying to predict market tops and bottoms is a fool's game.

robin1620 It's time to go all in.

***

Here's what Hulbert says to do:

Few investors find solace from knowing that, if they wait long enough, stocks will eventually recover from a bear market. After all, as Keynes famously said, in the long run, we are all dead.

Yet history shows that typical bear-market recovery times are hardly “the long run.” Since 1926, it has taken an average of 3.3 years for stocks to surpass their high set before the typical bear market began.

Unless you think the next bear market and subsequent recovery will be worse than average, sticking with stocks is the best response to the certainty that, sooner or later, the current bull market will come to an end.

***

And what am I doing?  I'm taking small profits bit-by-bit as the market goes higher and higher.  What am I selling?  Stuff that I won't really mind purging out of my portfolio plus trimming stuff that is looking expensive.

Saturday, March 08, 2014

dividend stocks

Investing in dividend stocks isn't just for retirees. If you're serious about generating strong long-term returns, then dividend stocks need to be a big part of your portfolio.

Not only do dividend stocks have less volatility year-to-year, they outperform non-dividend paying stocks over time too. That's right - those "boring" dividend stocks offer lower risk and higher total returns over the long run than those glamorous non-payers.

After last year's nearly +30% run up in the market, you might have forgotten that total return comes from two sources: price appreciation and dividends.

And believe it or not, over the last 80+ years, dividends have accounted for more than 40% of the total return equation.

A recent study by Ned Davis Research shows that dividend-paying stocks outperform their non-paying counterparts by a dramatic amount. From 1972 through 2013, non-dividend paying stocks earned a measly +2.3% return per year. But dividend-paying stocks crushed it with a +9.3% average annual return. And those that paid a dividend and raised it year after year did even better - generating a compound annual return of +10.1%!

Historically, companies have paid out a little over half of their earnings in the form of dividends, while the stock market has averaged a dividend yield of 4.4%. But the roaring bull market of the 1980s and 90s shifted focus away from dividends. By the year 2000, the payout ratio was hovering around 30%, while the market was yielding just 1.2%.

But after a decade of negative price returns, dividends appear to be making a bit of a comeback. The number of companies in the S&P 500 paying dividends (418) is at a 16-year high. And the current payout ratio of 32% is near a 10-year non-recessionary high as the dollar amount of dividends paid has more than doubled since 2004. Despite record high prices, the S&P currently yields 2.0%.

-- Todd Bunton, Zacks Weekend Wisdom

Friday, March 07, 2014

6 big myths about millionaires

While doing research for my book, "The Eventual Millionaire," I interviewed more than 100 millionaires. They came from all walks of life and made their first million in dozens of different ways, from starting their own businesses to investing in the stock market or real estate. And those aren't the only paths to becoming a millionaire, either: Others hit the mark by simply living below their means and saving portions of each paycheck.

Before you can make a million, though, you need to get past the mystique and the myths surrounding it. Here are six common myths about millionaires debunked.

Myth 1: Millionaires are smarter

People tend to put millionaires on a pedestal: They must be better or smarter than everyone else in order to achieve that goal. But that general statement simply isn't true. Millionaires are ordinary people who have achieved extraordinary goals, but they make mistakes like everyone else. They may misspell words; they may even have learning disabilities. They've likely been in debt and had to dig themselves out. They've had ideas and businesses fail. Most of the ones I interviewed for my book have worked their way up the ladder, learning and stumbling along the way.

Rather than having lots of book smarts, what most millionaires have is a knack for setting goals for themselves and working toward them, without letting excuses get in their way.

Myth 2: Millionaires are just luckier

Millionaires are the luckiest among us, right? They won the lottery, struck gold with their very first attempt at launching a business or haphazardly landed their dream jobs with massive salaries. Not so: Pure luck is not a factor in achieving success. Rather, truly successful people make their own luck. After all, a million-dollar idea is worth nothing without execution.

Myth 3: Millionaires live lavishly

When you think of millionaires, you may picture people living in luxurious mansions and driving expensive sports cars. The reality? Millionaires are often the people next door: They drive Hondas and Volvos. They're frugal (57 percent of the ones I interviewed described themselves as such). They often spend their money on necessities and a few things that are very important to them. Think Warren Buffett: The celebrated multi-billionaire famously still lives in the Omaha, Neb., house he bought in 1958 for $31,500.

In most cases, millionaires have gotten to where they are precisely because they've practiced excellent savings habits and live frugally. They learn to make smart choices, and they don't stop just because they hit the $1 million mark.

Myth 4: Most millionaires were born into money

Another common myth is that millionaires were born into money or inherited it. But that's not often the case. In a recent survey, Fidelity Investments found that 86 percent of millionaires are self-made. And among the more than 100 millionaires I interviewed for my book, each was self-made and only 26 percent of them said they even had connections to important people beforehand.

Myth 5: Millionaires have to be fearless

Though it may seem like the only way to become a millionaire is to forge full-steam ahead and assume a lot of risk, fears are totally normal, even for the ultra-successful. Fifty-seven percent of the millionaires I surveyed said they were scared before starting their own business: scared of failure, disappointing their spouses or their families, scared of losing everything.

Success requires some risk, but wise millionaires don't want to take uncalculated gambles. Millionaires have learned how to examine an opportunity and analyze the risk. They will even do small tests beforehand to see if an idea will work before going all in. They prefer to know as much information as they can ahead of time so they don't make a bad investment.

Most millionaires find a happy medium between optimism and pessimism; they figure out how to examine opportunities realistically. They acknowledge amazing potential, but work tirelessly to learn and predict beforehand to make sure their investments pay off.

Myth 6: They earn million-dollar paychecks

It's true that many millionaires have earned their money by starting (or selling) their own businesses or finding high-paying positions within organizations. But this certainly isn't the only way to amass $1 million. In his book "Millionaire Teacher," Andrew Hallam explains how he saved over $1 million as a teacher well before retirement age, outlining how he used low-cost index funds and a disciplined approach to saving, investing and living on a budget to build a nest egg most of his fellow teachers would envy.

In addition to investing in the stock market, like Hallam, other millionaires boost their bottom lines by adding second jobs or passive streams of income.

*** [10/25/14]

see also 5 Things Most People Don't Realize About Millionaires

Myths about millionaires abound: they're all greedy, or trust-fund babies, or like to flaunt their wealth.

Many people think "that millionaires are a lot like Kim Kardashian," says Cathy McBreen, managing director of Spectrem, which has tracked and polled the nation's richest households for years. "But they tend to be conservative with their spending," she says. "They're not out there buying mink coats and jewelry every day."

In fact, most millionaires spend more on charity than on bling. Spectrem has also found that most millionaires didn't inherit money, and that the percentage that did is actually shrinking as the number of millionaires grows.

When asked how their wealth was created, a whopping 94% of millionaires surveyed by Spectrem credited hard work. The number two factor? Education, cited by 87%. That ranked it ahead of smart investing (83%), frugality (78%) and risk-taking (60%).

Much farther down on the list: being in the right place at the right time (40%), luck (36%), inheritance (31%), and family connections (8%).

The percentage of millionaires who inherited some of their wealth has dropped to 18% as the number of millionaire households hit a record high last year of 9.63 million, McBreen says.

Sunday, March 02, 2014

Wall Street should hate Warren Buffett

The best course of action is to take almost no action, in Buffett's view. Stick to what you know, which is probably nothing. Buy a basket of 500 stocks, a smattering of bonds, and forget about it for the next 100 years or so. Treat investing this way and you'll actually beat the experts in the long run, Buffett says.

"The goal of the nonprofessional should not be to pick winners -- neither he nor his 'helpers' can do that -- but should rather be to own a cross section of businesses that in aggregate are bound to do well," Buffett writes. "A low-cost S&P 500 index fund will achieve this goal."

Oh, and you should definitely stop listening to those experts, he writes:

"Because there is so much chatter about markets, the economy, interest rates, price behavior of stocks, etc., some investors believe it is important to listen to pundits -- and, worse yet, important to consider acting upon their comments," Buffett writes, adding: "In the 54 years [partner Charlie Munger and I] have worked together, we have never forgone an attractive purchase because of the macro or political environment, or the views of other people."

This is a direct shot at CNBC, Bloomberg TV and any other outlet full of talking heads claiming to tell you how to make money. It's a direct shot at the hedge funds charging huge fees for their supposed investing wizardry, even as they are consistently trounced by those dumb S&P 500 index funds. It's a direct shot at the brokers who make commissions on unnecessary and unhelpful trades and at mutual funds that rake in fees with "active management." It's a direct shot at the newsletter writers and tea-leaf readers who claim they can time the market using Hindenburg Omens or Death Crosses or zodiac signs or whatever.

Here's another shot at the business model of CNBC, and much of the financial-news industry:

"If you can enjoy Saturdays and Sundays without looking at stock prices, give it a try on weekdays," he advises.

Zing! It's true, though. It's hard to think of information much less useful to you than daily stock prices. Unless, of course, those stock prices are collapsing, in which case it's usually a great time to buy more stocks.