Bank bailouts are turning out to be great business for the government. Unfortunately for taxpayers, other federal rescues will almost certainly wind up in the red.
The Treasury Department said Monday it will begin selling its stake in Citigroup at a potential profit of about $7.5 billion -- not a bad haul for an 18-month investment.
The move is a major step in the government's effort to unravel investments it made in banks under the $700-billion Troubled Asset Relief Program at the height of the financial crisis.
Yet a year and a half after Congress passed the big bailout, other parts of it — particularly troubled automakers General Motors and Chrysler and insurer American International Group — show no signs of being profitable.
Despite the returns from Citi and other banks, analysts and even the Treasury Department predict the bailout will wind up costing taxpayers at least $100 billion. The bailouts of mortgage giants Fannie Mae and Freddie Mac, which were not included in TARP, will add billions more.
But the money the government makes off banks helps offset the damage. With the sale of the Citi shares, the eight major banks that got bailout money funds will have repaid the government in full. Those investments have netted the government $15.4 billion from dividends, interest and the sale of bank stock warrants, which gave the government the right to buy stock in the future at a fixed price.
Based on Monday's share price, selling its 27% stake in Citi would add about $7.5 billion in profits. The stock fell 3% to $4.18 a share Monday after news of the planned Treasury sales. But that still puts it well above the $3.25 a share the government paid.
Friday, April 23, 2010
Thursday, April 22, 2010
buy signal
If the trend is your friend, as the Wall Street cliché goes, then the stock market has been an incredibly friendly place of late.
What I have in mind is a rare buy signal that was generated a couple of weeks ago by a trend-following indicator with a good long-term record. Prior to the recent buy signal, there had been only 12 of them since 1967.
And two of those 12 prior buy signals occurred in the last 12 months alone. In other words, between 1967 and March 2009, this indicator gave just 10 buy signals -- an average of just one every 4.3 years. Since March 2009, in contrast, they have averaged once every four months or so.
The indicator in question comes from Ned Davis Research, the quantitative research firm. It generates a buy signal whenever the percentage of common stocks trading above their 50-day moving averages rises above 90%. Davis refers to such events as a "breadth thrust."
The recent buy signal, according to this indicator, occurred on April 5. The other buy signals over the last year occurred on May 4 and Sep. 16 of last year.
What I have in mind is a rare buy signal that was generated a couple of weeks ago by a trend-following indicator with a good long-term record. Prior to the recent buy signal, there had been only 12 of them since 1967.
And two of those 12 prior buy signals occurred in the last 12 months alone. In other words, between 1967 and March 2009, this indicator gave just 10 buy signals -- an average of just one every 4.3 years. Since March 2009, in contrast, they have averaged once every four months or so.
The indicator in question comes from Ned Davis Research, the quantitative research firm. It generates a buy signal whenever the percentage of common stocks trading above their 50-day moving averages rises above 90%. Davis refers to such events as a "breadth thrust."
The recent buy signal, according to this indicator, occurred on April 5. The other buy signals over the last year occurred on May 4 and Sep. 16 of last year.
How has the stock market performed following past buy signals? Quite well, according to Davis' calculations
| Period after buy signal | Average return of S&P 500 | Worst experience | Best experience |
| Next month | 4.6% | 1.1% | 11.1% |
| Next quarter | 8.2% | 0.4% | 13.7% |
| Next 6 months | 13.1% | 4.9% | 24.3% |
| Next year | 19.7% | 11.6% | 33.9% |
It's worth noting, furthermore, that unlike many other trend-following indicators that have been biased upwards in recent years by the increasing number of interest-rate sensitive issues, Davis' calculations are based on a subset of stocks that eliminates closed-end funds, bond funds, exchange-traded funds, and the like.
Does this indicator mean you should throw caution to the winds? Of course not. As Davis points out to his clients, "one should never say 'never' regarding the stock market."
[via playtennis @ chucks_angels]Sunday, April 18, 2010
value traps
To be a great investor, you need to not only invest in great opportunities, but also avoid terrible ones. Here are some value traps you need to learn to recognize:
The quarter-life crisis: Beware the dominant company whose once- sky-high growth has stalled. Its price-to-earnings (P/E) ratio may be just half of its five-year average, and its earnings may have doubled over the past years, but that doesn't mean it will return to former lofty levels. It may have dug itself into a hole by expanding too quickly and paying too much for acquisitions and stock buybacks. Technology may have evolved and competitors may have emerged, stealing some of its thunder (and profits).
The soaring cyclical: Cyclical companies such as semiconductor makers and oilfield services companies, whose fortunes rise and fall with the economy, have counter-intuitive valuations. They look cheapest when they've reached their priciest, and vice versa. A time of high profits means a time of low profits is ahead. Consider these when their P/Es are rising, not shrinking.
The small-cap Methuselah: Here you have century-old small-caps you've never heard of that occasionally grow at rapid rates for a few years. When this happens, Wall Street analysts sometimes expect the growth to continue. But you won't find long-run compounding machines among small-caps. Companies with long histories of creating shareholder value become mid-cap or large-cap companies.
The rule taker: These companies don't have make-or-break rules - they just take them. Their business is standing on the tracks as a technological freight train is about to blow through. Save for a Hail Mary or two, rule-takers are out of options. Examples would be video rental companies in a new age of digital content distribution.
Instead of considering value traps, seek great, simple-to- understand businesses at good prices.
The quarter-life crisis: Beware the dominant company whose once- sky-high growth has stalled. Its price-to-earnings (P/E) ratio may be just half of its five-year average, and its earnings may have doubled over the past years, but that doesn't mean it will return to former lofty levels. It may have dug itself into a hole by expanding too quickly and paying too much for acquisitions and stock buybacks. Technology may have evolved and competitors may have emerged, stealing some of its thunder (and profits).
The soaring cyclical: Cyclical companies such as semiconductor makers and oilfield services companies, whose fortunes rise and fall with the economy, have counter-intuitive valuations. They look cheapest when they've reached their priciest, and vice versa. A time of high profits means a time of low profits is ahead. Consider these when their P/Es are rising, not shrinking.
The small-cap Methuselah: Here you have century-old small-caps you've never heard of that occasionally grow at rapid rates for a few years. When this happens, Wall Street analysts sometimes expect the growth to continue. But you won't find long-run compounding machines among small-caps. Companies with long histories of creating shareholder value become mid-cap or large-cap companies.
The rule taker: These companies don't have make-or-break rules - they just take them. Their business is standing on the tracks as a technological freight train is about to blow through. Save for a Hail Mary or two, rule-takers are out of options. Examples would be video rental companies in a new age of digital content distribution.
Instead of considering value traps, seek great, simple-to- understand businesses at good prices.
Friday, April 16, 2010
SEC accuses Goldman Sachs of civil fraud
One day after watching on CNBC some of Enron: The Smartest Guys in the Room comes this..
The government has accused Goldman Sachs & Co. of defrauding investors by failing to disclose conflicts of interest in mortgage investments it sold as the housing market was faltering.
The Securities and Exchange Commission said in a civil complaint Friday that Goldman failed to disclose that one of its clients helped create — and then bet against — subprime mortgage securities that Goldman sold to investors.
Goldman Sachs denied the allegations. In a statement, it called the SEC's charges "completely unfounded in law and fact" and said it will contest them.
Goldman Sachs shares fell more than 13 percent after the SEC announcement, which also caused shares of other financial companies to sink. The Dow Jones industrial average fell more than 140 points in midday trading.
[Not that I'm equating Goldman Sachs with Enron or anything..]
The government has accused Goldman Sachs & Co. of defrauding investors by failing to disclose conflicts of interest in mortgage investments it sold as the housing market was faltering.
The Securities and Exchange Commission said in a civil complaint Friday that Goldman failed to disclose that one of its clients helped create — and then bet against — subprime mortgage securities that Goldman sold to investors.
Goldman Sachs denied the allegations. In a statement, it called the SEC's charges "completely unfounded in law and fact" and said it will contest them.
Goldman Sachs shares fell more than 13 percent after the SEC announcement, which also caused shares of other financial companies to sink. The Dow Jones industrial average fell more than 140 points in midday trading.
[Not that I'm equating Goldman Sachs with Enron or anything..]
Tuesday, April 13, 2010
T. Rowe Price
Buying obscure or out-of-favor growth stocks is a very reliable recipe for making money in the market. This is an idea Thomas Rowe Price (1898-1983) — the founder of Baltimore-based T. Rowe Price, the firm — hatched back in the 1930s.
Price was a capable hand. He was a growth investor, but he was no fool — he bought growth stocks only when they were cheap. He knew price paid was the important consideration.
Twice in his career, Price closed his fund because he thought the market was too expensive, based on his inability to find cheap growth stocks. Once he closed it from October 1967-June 1970. And the other time was from March 1972-September 1974. During both periods, the market crashed.
Keep in mind that when he closed these funds, he was getting more than $1 million a day in new money from investors wanting to get in the market. Yet when he reopened his fund near the market bottoms — when things were cheap — investor interest was minimal. So there you go. Some things never change. Plus, I think few fund managers today would have the guts to close their fund when so much money — the source of their fees — was coming in.
Price’s idea was very simple on the surface. He thought the best way for an investor to make money in stocks was to buy growth — and then hang on for the long haul. He defined a growth stock this way: “Long-term earnings growth, reaching a new high level per share at the peak of each succeeding major business cycle and which gives indications of reaching new high earnings at the peak of future business cycles.” Note, by Price’s definition, you could own cyclical stocks, which many growth investors these days shun illogically.
Where Price turned Wall Street on its head was in what he thought was the least risky time to own such stocks. Price thought the best and least risky time to own a growth stock was during the early stages of growth.
Most people think that larger, more mature companies are less risky than younger, faster-growing ones. Not so for Price, who looked at companies as following a life cycle, like people do. There was growth, maturity and, finally, decadence. Here is Price in his own words, from a 1939 pamphlet:
“Insurance companies know that a greater risk is involved in insuring the life of a man 50 years old than a man 25, and that a much greater risk is involved in insuring a man of 75 than one of 50. They know, in other words, that risk increases as a man reaches maturity and starts to decline…
“In very much the same way, common sense tells us that an investment in a business affords great gain possibilities and involves less risk of loss while the long-term, or secular, earnings trend is still growing than after it has reached maturity and starts to decline… The risk factor increases when maturity is reached and decadence begins…”
Price went on to show that investing his way during the Great Depression would’ve produced a 67% gain, whereas the rest of the market lost money. In the 1930s, people focused on current dividends, and that meant they were reluctant to invest in a growth stock (which typically pays no dividend). Price thought that was a mistake, as I do. “High current income,” he wrote, “is obtained at the sacrifice of future income…”
In his day, Price was a force of nature. He was known as “Mr. Price” to nearly everyone. He was passionate about investing and still came to the office at the age of 83, rising at 5 a.m. every day. If you want to read more about Price, I would recommend John Train’s The Money Masters, which includes a chapter on Price, along with chapters on many other great investors.
In his day, Price was a force of nature. He was known as “Mr. Price” to nearly everyone. He was passionate about investing and still came to the office at the age of 83, rising at 5 a.m. every day. If you want to read more about Price, I would recommend John Train’s The Money Masters, which includes a chapter on Price, along with chapters on many other great investors.
Sincerely,
Chris Mayer
Penny Sleuth
*** [T. Rowe Price Report, Summer 2012]
Forbes magazine called him the “Sage of Baltimore.” Barron’s described his career as the “triumph of a visionary.” Author John Train devoted a chapter to him in his book profiling a dozen “money masters” of the 20th century.
Ironically, Thomas Rowe Price, Jr., who died in 1983, never studied economics or finance. Nor did he claim unusual insights that were unfathomable to the average investor. To identify fertile fields, he once said, required only “what my grandmother called gumption, my father called horse sense, and most people call common sense.”
And, perhaps because he was a very private person, he had little interaction with Wall Street.
Thomas Rowe Price, Jr.’s successful career was molded by the foresight to anticipate fundamental changes in economic trends, the patience to pursue long-term investment strategies, and the independence and self-confidence to take stands that often put him at odds with conventional wisdom.
“He had the courage to stand by his convictions, even when everybody else disagreed with him,” recalled Charles W. Shaeffer, a colleague who joined Mr. Price when the firm was founded 75 years ago.
“He was never frightened of standing alone when the crowd was going the other way,” Thomas Rowe Price III, his son, said. “In fact, he loved it. He would go the other way sometimes out of sheer obstinacy.”
This frequently required staunch investment fortitude as well as foresight, but Mr. Price usually remained unshakable in his beliefs. His growth stock approach to investing, developed in the 1930s, contradicted the conventional view of stocks as cyclical investments.
“He was truly an independent thinker,” says David Testa, former vice chairman and chief investment officer of the firm. “His idea of looking at growth of the income statement in the middle of the Depression was unique. To have the guts to try and buy companies because they were going to grow in the mid-1930s was
really quite something.”
Jack Laporte, a veteran portfolio manager with the firm, adds, “A lot of people don’t realize how revolutionary many of his thoughts were. In the early 1950s, investors in general thought equities were so risky that they demanded that stocks yield as much or more than bonds. Mr. Price said investors should really focus on growth in dividends and earnings and that was the foundation of his growth stock theory of investing and the Growth Stock Fund.”
Price was a capable hand. He was a growth investor, but he was no fool — he bought growth stocks only when they were cheap. He knew price paid was the important consideration.
Twice in his career, Price closed his fund because he thought the market was too expensive, based on his inability to find cheap growth stocks. Once he closed it from October 1967-June 1970. And the other time was from March 1972-September 1974. During both periods, the market crashed.
Keep in mind that when he closed these funds, he was getting more than $1 million a day in new money from investors wanting to get in the market. Yet when he reopened his fund near the market bottoms — when things were cheap — investor interest was minimal. So there you go. Some things never change. Plus, I think few fund managers today would have the guts to close their fund when so much money — the source of their fees — was coming in.
Price’s idea was very simple on the surface. He thought the best way for an investor to make money in stocks was to buy growth — and then hang on for the long haul. He defined a growth stock this way: “Long-term earnings growth, reaching a new high level per share at the peak of each succeeding major business cycle and which gives indications of reaching new high earnings at the peak of future business cycles.” Note, by Price’s definition, you could own cyclical stocks, which many growth investors these days shun illogically.
Where Price turned Wall Street on its head was in what he thought was the least risky time to own such stocks. Price thought the best and least risky time to own a growth stock was during the early stages of growth.
Most people think that larger, more mature companies are less risky than younger, faster-growing ones. Not so for Price, who looked at companies as following a life cycle, like people do. There was growth, maturity and, finally, decadence. Here is Price in his own words, from a 1939 pamphlet:
“Insurance companies know that a greater risk is involved in insuring the life of a man 50 years old than a man 25, and that a much greater risk is involved in insuring a man of 75 than one of 50. They know, in other words, that risk increases as a man reaches maturity and starts to decline…
“In very much the same way, common sense tells us that an investment in a business affords great gain possibilities and involves less risk of loss while the long-term, or secular, earnings trend is still growing than after it has reached maturity and starts to decline… The risk factor increases when maturity is reached and decadence begins…”
Price went on to show that investing his way during the Great Depression would’ve produced a 67% gain, whereas the rest of the market lost money. In the 1930s, people focused on current dividends, and that meant they were reluctant to invest in a growth stock (which typically pays no dividend). Price thought that was a mistake, as I do. “High current income,” he wrote, “is obtained at the sacrifice of future income…”
In his day, Price was a force of nature. He was known as “Mr. Price” to nearly everyone. He was passionate about investing and still came to the office at the age of 83, rising at 5 a.m. every day. If you want to read more about Price, I would recommend John Train’s The Money Masters, which includes a chapter on Price, along with chapters on many other great investors.
In his day, Price was a force of nature. He was known as “Mr. Price” to nearly everyone. He was passionate about investing and still came to the office at the age of 83, rising at 5 a.m. every day. If you want to read more about Price, I would recommend John Train’s The Money Masters, which includes a chapter on Price, along with chapters on many other great investors.
Sincerely,
Chris Mayer
Penny Sleuth
*** [T. Rowe Price Report, Summer 2012]
Forbes magazine called him the “Sage of Baltimore.” Barron’s described his career as the “triumph of a visionary.” Author John Train devoted a chapter to him in his book profiling a dozen “money masters” of the 20th century.
Ironically, Thomas Rowe Price, Jr., who died in 1983, never studied economics or finance. Nor did he claim unusual insights that were unfathomable to the average investor. To identify fertile fields, he once said, required only “what my grandmother called gumption, my father called horse sense, and most people call common sense.”
And, perhaps because he was a very private person, he had little interaction with Wall Street.
Thomas Rowe Price, Jr.’s successful career was molded by the foresight to anticipate fundamental changes in economic trends, the patience to pursue long-term investment strategies, and the independence and self-confidence to take stands that often put him at odds with conventional wisdom.
“He had the courage to stand by his convictions, even when everybody else disagreed with him,” recalled Charles W. Shaeffer, a colleague who joined Mr. Price when the firm was founded 75 years ago.
“He was never frightened of standing alone when the crowd was going the other way,” Thomas Rowe Price III, his son, said. “In fact, he loved it. He would go the other way sometimes out of sheer obstinacy.”
This frequently required staunch investment fortitude as well as foresight, but Mr. Price usually remained unshakable in his beliefs. His growth stock approach to investing, developed in the 1930s, contradicted the conventional view of stocks as cyclical investments.
“He was truly an independent thinker,” says David Testa, former vice chairman and chief investment officer of the firm. “His idea of looking at growth of the income statement in the middle of the Depression was unique. To have the guts to try and buy companies because they were going to grow in the mid-1930s was
really quite something.”
Jack Laporte, a veteran portfolio manager with the firm, adds, “A lot of people don’t realize how revolutionary many of his thoughts were. In the early 1950s, investors in general thought equities were so risky that they demanded that stocks yield as much or more than bonds. Mr. Price said investors should really focus on growth in dividends and earnings and that was the foundation of his growth stock theory of investing and the Growth Stock Fund.”
Friday, April 02, 2010
concentrated investing
concentrated investors are typically successful. Among brokerage-account holders with at least $100,000, those with just a handful of holdings tend to buy stocks that go on to beat the stocks they sell by three percentage points a year, according to a new study scheduled for publication this fall in the Journal of Financial and Quantitative Analysis. For account holders with lots of stocks, the average record is grim: The stocks sold go on to outperform the ones bought by 1.8 percentage points a year. The second thing to keep in mind is that no one criticizes the small-business owner for staking too much capital in a single company. Your concentrated portfolio makes you a business owner with stakes in five to 10 companies. And you have the advantage of picking the best ones from thousands that are already successful.
[on the other hand]
[on the other hand]
Sunday, March 28, 2010
simple decision making
A very interesting study was performed a while back that tested our human decision making process and information feedback loop.
A group of participants was divided into two groups. Each group was given the same exercises to complete with the understanding that they would be graded on results.
The difference between the groups, however, was that the first group was given a simple set of instructions and straightforward feedback, while the second group was provided with complex procedures and feedback.
As you might imagine the first group consistently outperformed the second.
Furthermore, the first group continued to improve throughout the process while the second stagnated. These results seem interesting and informative on their own. But here’s the truly amazing part ... before the participants received the results, group one participants (outperformance group) were given the option of changing their original answers using the complex set of procedures. Group one routinely chose the more complex system for reasoning – believing that system must be superior. And you guessed it ... their results worsened to the levels of group two.
This seems impossible to believe. They had an effective system producing strong results, yet chose to deviate only because their approach [seemed too simple?]
***
I recently read James Montier’s Value Investing: Tools and Techniques for Intelligent Investment. It’s a meaty book that compiles a lot of research. Much of it shows how we are our own worst enemy.
[A] chapter I like is “Keep It Simple, Stupid.” It illustrates another key point about the nature of investing: It pays to focus on a handful of essential details and ignore the rest. Montier shows us experiments in which people made worse decisions when given more information. For example, in one instance, researchers asked people to choose the best of four cars given only four pieces of information on each car. (In the examples, one car is noticeably and objectively better than the others.) People picked the best car 75% of the time. When given 12 pieces of information, their accuracy dropped to only 25%. The added information was more than just extraneous; it made their choices worse.
In the context of investing in stocks, it’s better to focus in on key variables that clearly matter and ignore the rest. My investment process aims to do that by boiling down the many details of investing in a company into four major areas. Too many details spoil the broth, but most investors haven’t learned this. “Our industry is obsessed with the minutia of detail,” Montier writes.
A group of participants was divided into two groups. Each group was given the same exercises to complete with the understanding that they would be graded on results.
The difference between the groups, however, was that the first group was given a simple set of instructions and straightforward feedback, while the second group was provided with complex procedures and feedback.
As you might imagine the first group consistently outperformed the second.
Furthermore, the first group continued to improve throughout the process while the second stagnated. These results seem interesting and informative on their own. But here’s the truly amazing part ... before the participants received the results, group one participants (outperformance group) were given the option of changing their original answers using the complex set of procedures. Group one routinely chose the more complex system for reasoning – believing that system must be superior. And you guessed it ... their results worsened to the levels of group two.
This seems impossible to believe. They had an effective system producing strong results, yet chose to deviate only because their approach [seemed too simple?]
***
I recently read James Montier’s Value Investing: Tools and Techniques for Intelligent Investment. It’s a meaty book that compiles a lot of research. Much of it shows how we are our own worst enemy.
[A] chapter I like is “Keep It Simple, Stupid.” It illustrates another key point about the nature of investing: It pays to focus on a handful of essential details and ignore the rest. Montier shows us experiments in which people made worse decisions when given more information. For example, in one instance, researchers asked people to choose the best of four cars given only four pieces of information on each car. (In the examples, one car is noticeably and objectively better than the others.) People picked the best car 75% of the time. When given 12 pieces of information, their accuracy dropped to only 25%. The added information was more than just extraneous; it made their choices worse.
In the context of investing in stocks, it’s better to focus in on key variables that clearly matter and ignore the rest. My investment process aims to do that by boiling down the many details of investing in a company into four major areas. Too many details spoil the broth, but most investors haven’t learned this. “Our industry is obsessed with the minutia of detail,” Montier writes.
the worst investor in America
U2 singer Bono's investments into Elevation Partners, which has offices in New York and Menlo Park, have helped make him the "worst investor in America," according to the online publication 24/7 Wall Street.
With large investments in Palm, Forbes, and Move.com -- "an unprecedented string of disastrous investments which even bad luck could not explain" -- Elevation Partners has earned the distinction of being "arguably the worst run institutional fund of any size in the United States," 24/7 Wall Street asserts.
Elevation bought 25 percent of Palm in 2007, and the company's stock has since tanked - down to $3.65 from $18 last September - after the company's efforts to regain mobile phone market share from Apple, RIM and other smartphone makers failed.
Elevation put $100 million into Move.com, which owns home and real estate websites, and company shares subsequently lost 50 percent of their value, 24/7 noted.
And recently, Elevation committed to investing $100 million in Yelp, the San Francisco online user generated business review site, with $25 million to the company and the rest to stockholders. Shortly thereafter, Yelp was hit with multiple lawsuits claiming that it sought to extort money from local businesses in exchange for manipulating reviews, a charge the company says is false.
[via chucks_angels]
With large investments in Palm, Forbes, and Move.com -- "an unprecedented string of disastrous investments which even bad luck could not explain" -- Elevation Partners has earned the distinction of being "arguably the worst run institutional fund of any size in the United States," 24/7 Wall Street asserts.
Elevation bought 25 percent of Palm in 2007, and the company's stock has since tanked - down to $3.65 from $18 last September - after the company's efforts to regain mobile phone market share from Apple, RIM and other smartphone makers failed.
Elevation put $100 million into Move.com, which owns home and real estate websites, and company shares subsequently lost 50 percent of their value, 24/7 noted.
And recently, Elevation committed to investing $100 million in Yelp, the San Francisco online user generated business review site, with $25 million to the company and the rest to stockholders. Shortly thereafter, Yelp was hit with multiple lawsuits claiming that it sought to extort money from local businesses in exchange for manipulating reviews, a charge the company says is false.
[via chucks_angels]
Wednesday, March 10, 2010
Carlos Slim overtakes Gates and Buffett
Bill Gates is no longer the world's richest man. Mexico’s Carlos Slim beat Bill Gates and Warren Buffett for the top spot on Forbes magazine’s annual list of billionaires, becoming the first person from outside the U.S. to lead the rankings in 16 years.
Though the software visionary's net worth rose $13 billion to a whopping $53 billion in the last year, he was ousted from the top of the money bin by Mexican telecom mogul Carlos Slim Helu, who took the No. 1 spot on Forbes' billionaire list this year, with a fortune of $53.5 billion.
The net worth of Slim, 70, who built a telecommunications empire after buying Mexico’s state-run phone monopoly two decades ago, rose $18.5 billion to $53.5 billion. Gates, 54, chairman of Microsoft Corp., fell to second as his net worth increased $13 billion to $53 billion. Buffett, 79, chairman of Berkshire Hathaway Inc., was third with $47 billion, a rise of $10 billion.
Slim is the first person other than Gates, last year’s richest person, or Buffett to top the list since 1994, which was also the last time a billionaire from outside the U.S. led the ranking: Japanese real estate tycoon Yoshiaki Tsutsumi.
“We’ve been watching Slim for a while and kind of wondered when the stars would align and he would take over,” Forbes senior editor Luisa Kroll said in an interview today.
More than 80 percent of Slim’s holdings are held in five public stocks, she said. “His net worth really reflects how well those stocks are doing. Everything that he owns has done very, very well this year.”
Though the software visionary's net worth rose $13 billion to a whopping $53 billion in the last year, he was ousted from the top of the money bin by Mexican telecom mogul Carlos Slim Helu, who took the No. 1 spot on Forbes' billionaire list this year, with a fortune of $53.5 billion.
The net worth of Slim, 70, who built a telecommunications empire after buying Mexico’s state-run phone monopoly two decades ago, rose $18.5 billion to $53.5 billion. Gates, 54, chairman of Microsoft Corp., fell to second as his net worth increased $13 billion to $53 billion. Buffett, 79, chairman of Berkshire Hathaway Inc., was third with $47 billion, a rise of $10 billion.
Slim is the first person other than Gates, last year’s richest person, or Buffett to top the list since 1994, which was also the last time a billionaire from outside the U.S. led the ranking: Japanese real estate tycoon Yoshiaki Tsutsumi.
“We’ve been watching Slim for a while and kind of wondered when the stars would align and he would take over,” Forbes senior editor Luisa Kroll said in an interview today.
More than 80 percent of Slim’s holdings are held in five public stocks, she said. “His net worth really reflects how well those stocks are doing. Everything that he owns has done very, very well this year.”
Tuesday, March 09, 2010
one year after the bottom
If you'd asked anyone on March 9, 2009, what they expected next from the stock market, they might have said, "More misery."
The Dow Jones Industrial Average ($INDU) had fallen to 6,547, its lowest close in 12 years. The Standard & Poor's 500 Index ($INX) had dropped 7 points to 677, its lowest close since 1996. The Nasdaq Composite Index's ($COMPX) finish of 1,269 was its worst since 2002.
But the next day, officials of Citigroup (C), one of the nation's most troubled financial institutions, said it was enjoying its best quarterly performance since 2007, and the Dow jumped 379 points.
That was the start of one of the U.S. stock market's great rallies. Since the March 9, 2009, bottom, the Dow is up 61.2%. The S&P 500 is up 68.3%, and the Nasdaq is up 83.8%.
As of Monday, 489 of the 500 stocks in the S&P 500 are higher since the March lows. The average gain: 115.6%.
The Dow Jones Industrial Average ($INDU) had fallen to 6,547, its lowest close in 12 years. The Standard & Poor's 500 Index ($INX) had dropped 7 points to 677, its lowest close since 1996. The Nasdaq Composite Index's ($COMPX) finish of 1,269 was its worst since 2002.
But the next day, officials of Citigroup (C), one of the nation's most troubled financial institutions, said it was enjoying its best quarterly performance since 2007, and the Dow jumped 379 points.
That was the start of one of the U.S. stock market's great rallies. Since the March 9, 2009, bottom, the Dow is up 61.2%. The S&P 500 is up 68.3%, and the Nasdaq is up 83.8%.
As of Monday, 489 of the 500 stocks in the S&P 500 are higher since the March lows. The average gain: 115.6%.
Friday, March 05, 2010
Grace Groner
Grace Groner lived a frugal life in a one-bedroom home in north suburban Lake Forest.
But when she died at age 100 in January, her attorney informed Lake Forest College that Groner — known for buying clothes from rummage sales and walking instead of buying a car — had left her alma mater $7 million.
When the attorney told the school how much her donation would be, the college president said "Oh, my God."
The millions came from a $180 stock purchase Groner made in 1935. She bought specially-issued stock in Abbott Laboratories, where she worked as a secretary for 43 years, and never sold it, the Chicago Tribune reported.
The money Groner donated will be used for a foundation to fund student internships and study-abroad programs. The money should bring the school more than $300,000 a year.
[via chucks_angels]
***
Grace Groner was born in 1909 in rural Illinois. Orphaned at age 12 and never married, she began her career during the Great Depression. She became a secretary, lived in a small cottage, bought used clothes, and never owned a car.
When Groner died in 2010, those close to her were shocked to learn she was worth at least $7 million. Even more amazing, she made it all on her own. The country secretary bought $180 worth of stocks in the 1930s, never sold, and let it compound into a fortune. She left it all to charity.
Now meet Richard Fuscone. He attended Dartmouth and earned an MBA from the University of Chicago. Rising through the ranks of high finance, Fuscone became Executive Chairman of the Americas at Merrill Lynch. Crain's once included Fuscone in a "40 under 40" list of successful businesspeople. He retired in 2000 to "pursue personal, charitable interests." Former Merrill CEO David Komansky praised Fuscone's "business savvy, leadership skills, sound judgment and personal integrity."
But Fuscone filed for bankruptcy in 2010 -- the same year Groner's fortune was revealed -- fighting to prevent foreclosure of his 18,471-square-foot, 11-bathroom, two-pool, two-elevator, seven-car-garage New York mansion. This was after selling another home in Palm Beach following a separate foreclosure. "My background is in the financial-services industry and I have been personally devastated by the financial crisis," Fuscone's bankruptcy filing allegedly stated. "I currently have no income."
These stories fascinate me. There is no plausible scenario in which a 100-year-old country secretary could beat Tiger Woods at golf, or be better at brain surgery than a brain surgeon. But -- fairly often -- that same country secretary can out-finance a Wall Street titan. Money is strange like that.
... basic behavioral differences are what separate the Grace Groners from the Richard Fuscones. Groner clearly understood patience. She understood frugality. She understood the value of a long-term view and how to not panic -- if only subconsciously. Fuscone, it seems, didn't. (To be fair, it's unclear exactly where his financial troubles came from.)
The traits most important to mastering your finances aren't typically taught in finance courses. You're more likely to see them in a psychology class. They include things like patience, an even temper, being skeptical of salesmen, and avoiding over-optimism. A lot of people miss this because it's not intuitive. But I think it explains, better than anything else, why so many people are bad with their money. And it extends beyond novices. The majority of highly educated, well-trained investment professionals perform abysmally. This has little to do with their understanding of finance and lots to do with the inability to control their emotions and behaviors.
But when she died at age 100 in January, her attorney informed Lake Forest College that Groner — known for buying clothes from rummage sales and walking instead of buying a car — had left her alma mater $7 million.
When the attorney told the school how much her donation would be, the college president said "Oh, my God."
The millions came from a $180 stock purchase Groner made in 1935. She bought specially-issued stock in Abbott Laboratories, where she worked as a secretary for 43 years, and never sold it, the Chicago Tribune reported.
The money Groner donated will be used for a foundation to fund student internships and study-abroad programs. The money should bring the school more than $300,000 a year.
[via chucks_angels]
***
Grace Groner was born in 1909 in rural Illinois. Orphaned at age 12 and never married, she began her career during the Great Depression. She became a secretary, lived in a small cottage, bought used clothes, and never owned a car.
When Groner died in 2010, those close to her were shocked to learn she was worth at least $7 million. Even more amazing, she made it all on her own. The country secretary bought $180 worth of stocks in the 1930s, never sold, and let it compound into a fortune. She left it all to charity.
Now meet Richard Fuscone. He attended Dartmouth and earned an MBA from the University of Chicago. Rising through the ranks of high finance, Fuscone became Executive Chairman of the Americas at Merrill Lynch. Crain's once included Fuscone in a "40 under 40" list of successful businesspeople. He retired in 2000 to "pursue personal, charitable interests." Former Merrill CEO David Komansky praised Fuscone's "business savvy, leadership skills, sound judgment and personal integrity."
But Fuscone filed for bankruptcy in 2010 -- the same year Groner's fortune was revealed -- fighting to prevent foreclosure of his 18,471-square-foot, 11-bathroom, two-pool, two-elevator, seven-car-garage New York mansion. This was after selling another home in Palm Beach following a separate foreclosure. "My background is in the financial-services industry and I have been personally devastated by the financial crisis," Fuscone's bankruptcy filing allegedly stated. "I currently have no income."
These stories fascinate me. There is no plausible scenario in which a 100-year-old country secretary could beat Tiger Woods at golf, or be better at brain surgery than a brain surgeon. But -- fairly often -- that same country secretary can out-finance a Wall Street titan. Money is strange like that.
... basic behavioral differences are what separate the Grace Groners from the Richard Fuscones. Groner clearly understood patience. She understood frugality. She understood the value of a long-term view and how to not panic -- if only subconsciously. Fuscone, it seems, didn't. (To be fair, it's unclear exactly where his financial troubles came from.)
The traits most important to mastering your finances aren't typically taught in finance courses. You're more likely to see them in a psychology class. They include things like patience, an even temper, being skeptical of salesmen, and avoiding over-optimism. A lot of people miss this because it's not intuitive. But I think it explains, better than anything else, why so many people are bad with their money. And it extends beyond novices. The majority of highly educated, well-trained investment professionals perform abysmally. This has little to do with their understanding of finance and lots to do with the inability to control their emotions and behaviors.
Friday, February 05, 2010
commission price war
Thursday, January 28, 2010
Are stocks cheap or dear?
In 2008 and 2009, investors experienced gut-wrenching declines and breathtaking surges in stock prices. Stocks are still not back to where they were at the start of 2008, but in the meantime, earnings have declined and dividends have been cut. So where are we now, at the beginning of 2010, with regard to price and value? Is there a compelling argument for the enterprising investor to deviate from a standard, balanced allocation?
First, it's instructive to look at economist Robert Shiller's website, which gives a historical glance at a cyclically adjusted price/earnings, or CAPE, ratio of the S&P 500 Index. (The concept of looking at this metric comes from Graham himself, and Grantham, Mayo, Van Otterloo analyst James Montier calls it the "Graham & Dodd P/E" in his book Value Investing: Tools and Techniques for Intelligent Investment.) Currently, the ratio is at nearly 21 times, which seems somewhat high by historical standards, though perhaps not inordinately so, given very low interest rates. The current multiple isn't nearly as high as the roughly 45 times earnings multiple the market reached in early 2000 or the 35 times earnings multiple it reached in 1929, but it doesn't exactly appear to be a bargain basement multiple either. The average multiple for the index since 1881 is 18 times, according to Montier.
Another possible cause for tempered expectations is Morningstar's own Market Valuation Graph, which shows the market to be 5% overpriced currently. That's not an egregious overpricing and certainly not as high as the all-time high of 14%, but it doesn't appear particularly cheap either. If we dig a little deeper into Morningstar's equity analysis, we see that only 35 stocks currently trade in 5-star territory or far enough below the analysts' fair value estimates to offer the margin of safety warranting a buy recommendation.
After sifting through all of this evidence, it appears that the market isn't cheap. In the last edition of The Intelligent Investor, when CAPE was a bit over 17 times, Graham argued against increasing stock exposure, saying, "It is hard for us to see how such a strong confidence can be justified at the levels existing in early 1972." Clearly, he'd say the same thing today at 21 times. In fact, in his other book Security Analysis, he remarked that buying stocks over 20 times average earnings was speculating more than investing, because that meant you were willing to accept an "earnings yield" of less than 5% on a risky asset.
***
Several of the successful market gurus I keep an eye on say the market remains attractively valued -- but not all of them.
First, it's instructive to look at economist Robert Shiller's website, which gives a historical glance at a cyclically adjusted price/earnings, or CAPE, ratio of the S&P 500 Index. (The concept of looking at this metric comes from Graham himself, and Grantham, Mayo, Van Otterloo analyst James Montier calls it the "Graham & Dodd P/E" in his book Value Investing: Tools and Techniques for Intelligent Investment.) Currently, the ratio is at nearly 21 times, which seems somewhat high by historical standards, though perhaps not inordinately so, given very low interest rates. The current multiple isn't nearly as high as the roughly 45 times earnings multiple the market reached in early 2000 or the 35 times earnings multiple it reached in 1929, but it doesn't exactly appear to be a bargain basement multiple either. The average multiple for the index since 1881 is 18 times, according to Montier.
Another possible cause for tempered expectations is Morningstar's own Market Valuation Graph, which shows the market to be 5% overpriced currently. That's not an egregious overpricing and certainly not as high as the all-time high of 14%, but it doesn't appear particularly cheap either. If we dig a little deeper into Morningstar's equity analysis, we see that only 35 stocks currently trade in 5-star territory or far enough below the analysts' fair value estimates to offer the margin of safety warranting a buy recommendation.
After sifting through all of this evidence, it appears that the market isn't cheap. In the last edition of The Intelligent Investor, when CAPE was a bit over 17 times, Graham argued against increasing stock exposure, saying, "It is hard for us to see how such a strong confidence can be justified at the levels existing in early 1972." Clearly, he'd say the same thing today at 21 times. In fact, in his other book Security Analysis, he remarked that buying stocks over 20 times average earnings was speculating more than investing, because that meant you were willing to accept an "earnings yield" of less than 5% on a risky asset.
***
Several of the successful market gurus I keep an eye on say the market remains attractively valued -- but not all of them.
Tuesday, January 26, 2010
Morningstar performance
Morningstar looks at how their stock picks have performed.
5-star wide moat did better than 1-star wide moat.
5-star narrow moat did batter than 1-star narrow moat.
So far, so good.
BUT 5-star no moat did worse than 1-star no moat.
And, in fact, 1-star no moat had the best performance of all.
So the logical conclusion must be, to get the best performance, buy the worst stocks in the Morningstar universe!
[Though it looks like the results were because the worst stocks went completely nuts in 2009 since they were so beaten down. So I'd stick with the 5-star wide moat stocks, which did nearly as well as the 1-star no moat stocks since inception.]
5-star wide moat did better than 1-star wide moat.
5-star narrow moat did batter than 1-star narrow moat.
So far, so good.
BUT 5-star no moat did worse than 1-star no moat.
And, in fact, 1-star no moat had the best performance of all.
So the logical conclusion must be, to get the best performance, buy the worst stocks in the Morningstar universe!
[Though it looks like the results were because the worst stocks went completely nuts in 2009 since they were so beaten down. So I'd stick with the 5-star wide moat stocks, which did nearly as well as the 1-star no moat stocks since inception.]
Sunday, January 17, 2010
a decade of living dangerously
It was a decade of living dangerously.
With interest rates low and lending standards lower, credit became the currency of the decade.
Exotic mortgage products helped housing prices more than double. Consumer spending shot up more than 48 percent - even while wages stagnated - as shoppers snapped up big-screen TVs, gadgets like iPhones and fashion labels like Gucci and Jimmy Choo.
The amount of debt consumers carried shot up 67 percent, peaking in June 2008 at $2.57 trillion. Likewise, businesses large and small borrowed money to finance a wave of mergers and expansion.
Then, the crash.
At the end of 2006, homeowners began defaulting on their mortgages at an alarming rate. The foreclosure rate broke record after record. Lenders failed by the dozen. In late 2009, more than 14 percent of homeowners with a mortgage were either behind on their payments or facing foreclosure.
For Bear Stearns and Lehman Brothers, which bet too heavily on securities backed by risky mortgages, the losses were fatal. The ripple effects across banking and other industries, sparked a recession that led to massive job losses and drastic cutbacks in consumer spending.
There are some signs of a recovery, but not of a quick rebound.
Stocks have recovered a portion of their losses, but it will appear on most investor's balance sheet as a lost decade - the first 10-year period investors saw a negative total return.
Nearly 27 million people are unemployed or underemployed. Consumers have cut back on spending and started saving, but it will take years to dig out of the debt hole. Home prices have receded to 2003 levels, and further in Arizona, California, Florida and Nevada.
The decade that began with the view that the sky was the limit is ending with both investors and consumers feeling grounded.
Here's a look at some of the key moments in personal finance in the 2000s.
With interest rates low and lending standards lower, credit became the currency of the decade.
Exotic mortgage products helped housing prices more than double. Consumer spending shot up more than 48 percent - even while wages stagnated - as shoppers snapped up big-screen TVs, gadgets like iPhones and fashion labels like Gucci and Jimmy Choo.
The amount of debt consumers carried shot up 67 percent, peaking in June 2008 at $2.57 trillion. Likewise, businesses large and small borrowed money to finance a wave of mergers and expansion.
Then, the crash.
At the end of 2006, homeowners began defaulting on their mortgages at an alarming rate. The foreclosure rate broke record after record. Lenders failed by the dozen. In late 2009, more than 14 percent of homeowners with a mortgage were either behind on their payments or facing foreclosure.
For Bear Stearns and Lehman Brothers, which bet too heavily on securities backed by risky mortgages, the losses were fatal. The ripple effects across banking and other industries, sparked a recession that led to massive job losses and drastic cutbacks in consumer spending.
There are some signs of a recovery, but not of a quick rebound.
Stocks have recovered a portion of their losses, but it will appear on most investor's balance sheet as a lost decade - the first 10-year period investors saw a negative total return.
Nearly 27 million people are unemployed or underemployed. Consumers have cut back on spending and started saving, but it will take years to dig out of the debt hole. Home prices have receded to 2003 levels, and further in Arizona, California, Florida and Nevada.
The decade that began with the view that the sky was the limit is ending with both investors and consumers feeling grounded.
Here's a look at some of the key moments in personal finance in the 2000s.
Wednesday, January 13, 2010
fund managers of the decade
Morningstar's picks for the fund managers of the decade: Bill Gross, Bruce Berkowitz, David Herro.
Monday, December 28, 2009
Positive indications in Asia
Shares in Asia rose on positive indications about recovery after Japan's government said their economy will expand for the first time in three years and industrial production rose at the fastest pace in six months in November, while China upwardly revised prior growth figures. Japan's Nikkei 225 Index rose 1.3% after it was reported that industrial production rose 2.6% in November versus the 2.5% estimate, despite a bigger drop in large retailer sales than expected at -9.6%. The Japanese government said on Dec. 25 that its 7.2 trillion yen ($78.8 billion) stimulus package unveiled earlier this month would probably boost GDP by 0.7% in 2010 and create about 200,000 jobs.
In China, the estimate of 2008 GDP was upwardly adjusted to 9.6% from 9.0% and the government said this year's previously reported quarterly figures will also increase. Chinese Premier Wen Jiabao reiterated the desire to cool property prices, saying that "property prices have risen too quickly in some areas and we should use taxes and loan interest rates to stabilize them," while maintaining a "moderately loose" monetary policy and a "proactive" fiscal stance, saying it would be a mistake to withdraw stimulus too quickly. Wen added that China will "absolutely not yield" to calls to allow the yuan to appreciate, saying that "Keeping the yuan's value basically steady is our contribution to the international community at a time when the world's major currencies have been devalued." Wen also addressed bank lending, saying "it would be good if our bank lending was more balanced, better structured and not on such a large scale," but that the situation "has been improving in the second half of this year."
Despite the property comments, shares of Chinese property stocks rose, and the Shanghai Composite increased 1.5%. Prices of property were also on the mind of investors in Hong Kong, after the city's government sold two sites at prices below market expectations, and the Hang Seng Index was the only major equity benchmark in Asia to decline, falling 0.2%, while South Korea's Kospi Index increased 0.2% and the Australian market was closed. In equity news, China Mobile (CHL $45) erased early losses and gained 0.3% despite a report that the company's Vice Chairman was being investigated by the government in connection with an unspecified "serious disciplinary breach."
[Schwab Alerts]
In China, the estimate of 2008 GDP was upwardly adjusted to 9.6% from 9.0% and the government said this year's previously reported quarterly figures will also increase. Chinese Premier Wen Jiabao reiterated the desire to cool property prices, saying that "property prices have risen too quickly in some areas and we should use taxes and loan interest rates to stabilize them," while maintaining a "moderately loose" monetary policy and a "proactive" fiscal stance, saying it would be a mistake to withdraw stimulus too quickly. Wen added that China will "absolutely not yield" to calls to allow the yuan to appreciate, saying that "Keeping the yuan's value basically steady is our contribution to the international community at a time when the world's major currencies have been devalued." Wen also addressed bank lending, saying "it would be good if our bank lending was more balanced, better structured and not on such a large scale," but that the situation "has been improving in the second half of this year."
Despite the property comments, shares of Chinese property stocks rose, and the Shanghai Composite increased 1.5%. Prices of property were also on the mind of investors in Hong Kong, after the city's government sold two sites at prices below market expectations, and the Hang Seng Index was the only major equity benchmark in Asia to decline, falling 0.2%, while South Korea's Kospi Index increased 0.2% and the Australian market was closed. In equity news, China Mobile (CHL $45) erased early losses and gained 0.3% despite a report that the company's Vice Chairman was being investigated by the government in connection with an unspecified "serious disciplinary breach."
[Schwab Alerts]
Monday, December 21, 2009
the worst decade ever for stocks
The U.S. stock market is wrapping up what is likely to be its worst decade ever.
In nearly 200 years of recorded stock-market history, no calendar decade has seen such a dismal performance as the 2000s.
Investors would have been better off investing in pretty much anything else, from bonds to gold or even just stuffing money under a mattress. Since the end of 1999, stocks traded on the New York Stock Exchange have lost an average of 0.5% a year thanks to the twin bear markets this decade.
The period has provided a lesson for ordinary Americans who used stocks as their primary way of saving for retirement.
Journal Community
Vote: Are you better off today than 10 years ago?
Many investors were lured to the stock market by the bull market that began in the early 1980s and gained force through the 1990s. But coming out of the 1990s—when a 17.6% average annual gain made it the second-best decade in history behind the 1950s—stocks simply had gotten too expensive. Companies also pared dividends, cutting into investor returns. And in a time of financial panic like 2008, stocks were a terrible place to invest.
With two weeks to go in 2009, the declines since the end of 1999 make the last 10 years the worst calendar decade for stocks going back to the 1820s, when reliable stock market records begin, according to data compiled by Yale University finance professor William Goetzmann. He estimates it would take a 3.6% rise between now and year end for the decade to come in better than the 0.2% decline suffered by stocks during the Depression years of the 1930s.
In nearly 200 years of recorded stock-market history, no calendar decade has seen such a dismal performance as the 2000s.
Investors would have been better off investing in pretty much anything else, from bonds to gold or even just stuffing money under a mattress. Since the end of 1999, stocks traded on the New York Stock Exchange have lost an average of 0.5% a year thanks to the twin bear markets this decade.
The period has provided a lesson for ordinary Americans who used stocks as their primary way of saving for retirement.
Journal Community
Vote: Are you better off today than 10 years ago?
Many investors were lured to the stock market by the bull market that began in the early 1980s and gained force through the 1990s. But coming out of the 1990s—when a 17.6% average annual gain made it the second-best decade in history behind the 1950s—stocks simply had gotten too expensive. Companies also pared dividends, cutting into investor returns. And in a time of financial panic like 2008, stocks were a terrible place to invest.
With two weeks to go in 2009, the declines since the end of 1999 make the last 10 years the worst calendar decade for stocks going back to the 1820s, when reliable stock market records begin, according to data compiled by Yale University finance professor William Goetzmann. He estimates it would take a 3.6% rise between now and year end for the decade to come in better than the 0.2% decline suffered by stocks during the Depression years of the 1930s.
Friday, December 18, 2009
the man who saved the economy (according to Warren Buffett)
Over dinner at the amazing Piccolo Pete's, the Italian restaurant in a working class neighborhood that seems to set aside most of the restaurant just for him, he said the economy had really been in desperate shape last fall.
The man who saved it, he said, was Ken Lewis, beleaguered head of Bank of America (BAC, Fortune 500). By buying Merrill Lynch just as everything at Lehman was falling apart, he put some confidence back into the system and stopped -- or helped mightily to stop -- a "run on the bank" which would have laid waste all of Wall Street.
If Merrill had failed, said Buffett, it would have been followed swiftly by Morgan (MS, Fortune 500) and then by Goldman. By overpaying wildly for Merrill, Lewis essentially saved the nation from financial collapse.
Without that buy, commercial paper would have simply stopped dead and the banks' slender capital would have been swamped by debt as that commercial paper could not be rolled over.
The man who saved it, he said, was Ken Lewis, beleaguered head of Bank of America (BAC, Fortune 500). By buying Merrill Lynch just as everything at Lehman was falling apart, he put some confidence back into the system and stopped -- or helped mightily to stop -- a "run on the bank" which would have laid waste all of Wall Street.
If Merrill had failed, said Buffett, it would have been followed swiftly by Morgan (MS, Fortune 500) and then by Goldman. By overpaying wildly for Merrill, Lewis essentially saved the nation from financial collapse.
Without that buy, commercial paper would have simply stopped dead and the banks' slender capital would have been swamped by debt as that commercial paper could not be rolled over.
value investing and longevity
VALUE investing is about buying undervalued securities. It's about looking at parts of the market where nobody is looking. And selling out when everybody starts to get excited.
Value investors have deep convictions on what they think offers value. And to minimise the chances of them being wrong, they allow for a significant 'margin of safety' - that is, the securities they buy into have to be so undervalued that even if things get much worse, there is not much room for them to fall further.
Value investing requires patience. It requires independence of thought. And because value investors have such deep conviction that what they buy is trading at below market value, even if the general market were to plunge, they don't panic. In fact, they would see this as an opportunity to buy more.
As a result of all these factors, value investors are said to sleep better at night. And conceivably, they are not so highly strung. Their stress level would be lower than those who chase after the market and whose mood swings along with it.
Perhaps all this explains why some well-known value investors live much longer than the average person.
Don't believe me? Let's see.
Benjamin Graham, father of value investing and mentor of Warren Buffett, is the author of Security Analysis and The Intelligent Investor. In Security Analysis, he advocated a cautious approach to investing. In terms of picking stocks, he recommended defensive investment in stocks trading below their tangible book value as a safeguard against future adverse developments often encountered in the stock market. A professor at Columbia Business School, he lived until 82.
David Dodd, also a professor at Columbia Business School and co-author of Security Analysis, lived until 93.
John Templeton was noted for borrowing money from family and friends when he was 27, to buy 100 shares of each company trading at less than US$1 (US$15 in current dollar terms) a share in 1939. He made many times the money back in a four-year period. He became a billionaire by pioneering overseas investment funds in the US. He died last year at 95, after devoting many of his later years to philanthropy.
Philip Fisher, author of the still-popular Common Stocks and Uncommon Profits, believed in long-term investing, in buying great companies at good prices, and then thumbing his nose at the taxman as he held, and held, and held. His most famous investment was his purchase of Motorola, a company he bought in 1955 when it was a radio manufacturer, and held until his death in March 2004 at age 96.
Another Philip, Philip Carret, the founder of Pioneer Fund, was also a hero of Warren Buffett. In his book A Money Mind at Ninety, he said he inherited his 'money mind'. He died at the age of 101. David Tripple, former chief investment officer of Pioneer Group, said: 'In 101 years, I don't think he ever once got sucked up into a fad or frenzy.'
Now let's look at some of the great value investors who are still active today.
Warren Buffett needs no introduction. He is 79 this year, and is still deploying his billions, most recently a US$26 billion bet on Burlington Northern Santa Fe railroad. He described the purchase as an opportunity to buy a business that's going to be around for 100 or 200 years.
Charlie Munger, vice-chairman of Berkshire Hathaway, has exerted key influence on the success of Mr Buffett's enterprise over many decades. He is 85 this year.
Martin Whitman is founder and portfolio manager of Third Avenue Value Fund. He is a 'buy and hold' value investor. He buys stock in companies he thinks have strong finances, competent management and an understandable business. Also, the company's stock must be cheap. He generally sells an investment only when there has been a fundamental change in the business or capital structure of the company that significantly affects the investment's inherent value, or when he believes that the market value of an investment is over-priced relative to its intrinsic value. He is 85 this year.
Recently, the Financial Times interviewed two active investors who are well past 100. Irving Kahn is the oldest active money manager on Wall Street at 103. Mr Kahn says he ignores market gyrations and typically holds stocks for at least three years and up to 15. His firm, Kahn Brothers, compares its philosophy to tending an orchard with different types of fruits, some of which ripen more slowly than others. Mr Kahn incidentally was Mr Graham's first teaching assistant and helped him with Security Analysis. Like Mr Graham, Mr Kahn seeks unloved and obscure stocks, eschewing high fliers.
Roy Neuberger and the company he founded, Neuberger Berman, also subscribe to similar principles. Mr Neuberger retired at 99 and today, at 106, is still consulted regularly by his 68-year-old protege Marvin Schwartz. The latter credits Mr Neuberger with providing appropriate perspective during recent hard times. 'In almost each and every instance, he advised us to buy in what would be a passing negative period,' Mr Schwartz was quoted by FT as saying.
The website Monevator also recently explored whether being a great investor also means you'll live longer. The article postulated why some of them lived to such a ripe old age. Among the reasons given were:
* Job satisfaction - People who are happier and lead productive lives have been shown to live healthier, longer lives. There's no doubt all these investors loved investing.
* Active mentally - Lots of old people in Japan now do brain training to ward off Alzhiemer's disease and other degenerative brain ailments. What could be more testing than trying the impossible - beating the market through stock picking?
* Eustress - the flipside of distress, eustress is a form of positive stress, associated with achieving in life.
* Intelligence, good upbringing and better health care - all the investors enjoyed these.
My take is that their longevity stems from their love of life in general. In a tribute to Philip Carret, the Outstanding Investors Digest wrote: 'Although he died at the age of 101, which many would consider to be a ripe old age, he was as young at heart, vital and as active to the last as anyone we know.'
[via brknews]
Value investors have deep convictions on what they think offers value. And to minimise the chances of them being wrong, they allow for a significant 'margin of safety' - that is, the securities they buy into have to be so undervalued that even if things get much worse, there is not much room for them to fall further.
Value investing requires patience. It requires independence of thought. And because value investors have such deep conviction that what they buy is trading at below market value, even if the general market were to plunge, they don't panic. In fact, they would see this as an opportunity to buy more.
As a result of all these factors, value investors are said to sleep better at night. And conceivably, they are not so highly strung. Their stress level would be lower than those who chase after the market and whose mood swings along with it.
Perhaps all this explains why some well-known value investors live much longer than the average person.
Don't believe me? Let's see.
Benjamin Graham, father of value investing and mentor of Warren Buffett, is the author of Security Analysis and The Intelligent Investor. In Security Analysis, he advocated a cautious approach to investing. In terms of picking stocks, he recommended defensive investment in stocks trading below their tangible book value as a safeguard against future adverse developments often encountered in the stock market. A professor at Columbia Business School, he lived until 82.
David Dodd, also a professor at Columbia Business School and co-author of Security Analysis, lived until 93.
John Templeton was noted for borrowing money from family and friends when he was 27, to buy 100 shares of each company trading at less than US$1 (US$15 in current dollar terms) a share in 1939. He made many times the money back in a four-year period. He became a billionaire by pioneering overseas investment funds in the US. He died last year at 95, after devoting many of his later years to philanthropy.
Philip Fisher, author of the still-popular Common Stocks and Uncommon Profits, believed in long-term investing, in buying great companies at good prices, and then thumbing his nose at the taxman as he held, and held, and held. His most famous investment was his purchase of Motorola, a company he bought in 1955 when it was a radio manufacturer, and held until his death in March 2004 at age 96.
Another Philip, Philip Carret, the founder of Pioneer Fund, was also a hero of Warren Buffett. In his book A Money Mind at Ninety, he said he inherited his 'money mind'. He died at the age of 101. David Tripple, former chief investment officer of Pioneer Group, said: 'In 101 years, I don't think he ever once got sucked up into a fad or frenzy.'
Now let's look at some of the great value investors who are still active today.
Warren Buffett needs no introduction. He is 79 this year, and is still deploying his billions, most recently a US$26 billion bet on Burlington Northern Santa Fe railroad. He described the purchase as an opportunity to buy a business that's going to be around for 100 or 200 years.
Charlie Munger, vice-chairman of Berkshire Hathaway, has exerted key influence on the success of Mr Buffett's enterprise over many decades. He is 85 this year.
Martin Whitman is founder and portfolio manager of Third Avenue Value Fund. He is a 'buy and hold' value investor. He buys stock in companies he thinks have strong finances, competent management and an understandable business. Also, the company's stock must be cheap. He generally sells an investment only when there has been a fundamental change in the business or capital structure of the company that significantly affects the investment's inherent value, or when he believes that the market value of an investment is over-priced relative to its intrinsic value. He is 85 this year.
Recently, the Financial Times interviewed two active investors who are well past 100. Irving Kahn is the oldest active money manager on Wall Street at 103. Mr Kahn says he ignores market gyrations and typically holds stocks for at least three years and up to 15. His firm, Kahn Brothers, compares its philosophy to tending an orchard with different types of fruits, some of which ripen more slowly than others. Mr Kahn incidentally was Mr Graham's first teaching assistant and helped him with Security Analysis. Like Mr Graham, Mr Kahn seeks unloved and obscure stocks, eschewing high fliers.
Roy Neuberger and the company he founded, Neuberger Berman, also subscribe to similar principles. Mr Neuberger retired at 99 and today, at 106, is still consulted regularly by his 68-year-old protege Marvin Schwartz. The latter credits Mr Neuberger with providing appropriate perspective during recent hard times. 'In almost each and every instance, he advised us to buy in what would be a passing negative period,' Mr Schwartz was quoted by FT as saying.
The website Monevator also recently explored whether being a great investor also means you'll live longer. The article postulated why some of them lived to such a ripe old age. Among the reasons given were:
* Job satisfaction - People who are happier and lead productive lives have been shown to live healthier, longer lives. There's no doubt all these investors loved investing.
* Active mentally - Lots of old people in Japan now do brain training to ward off Alzhiemer's disease and other degenerative brain ailments. What could be more testing than trying the impossible - beating the market through stock picking?
* Eustress - the flipside of distress, eustress is a form of positive stress, associated with achieving in life.
* Intelligence, good upbringing and better health care - all the investors enjoyed these.
My take is that their longevity stems from their love of life in general. In a tribute to Philip Carret, the Outstanding Investors Digest wrote: 'Although he died at the age of 101, which many would consider to be a ripe old age, he was as young at heart, vital and as active to the last as anyone we know.'
[via brknews]
Tuesday, December 08, 2009
Value Line's Samuel Eisenstadt fired
For 63 years, Samuel Eisenstadt was probably Value Line Inc.’s most valued employee. The statistician created an investment strategy that proved successful for decades and was endorsed by none other than Warren Buffett. But today he embarks on something new — unemployment.
Late last Friday afternoon, the firm’s new chief executive, Howard Brecher, called Mr. Eisenstadt and told him that his services were “no longer needed” and he was retiring, effective immediately, according to Mr. Eisenstadt. Yet the 87-year-old, who helped drive the Nazis out of France and Belgium as a member of the U.S Army’s 8th Armored Division, was in no mood to be shoved aside.
“I refuse to accept the explanation that I’m retiring,” Mr. Eisenstadt said. “I’m not retiring, and I don’t plan to retire. My mind is still sharp and wrapped up in my work. This is a very sad ending, and it really hurts.”
[via veryearly1]
Late last Friday afternoon, the firm’s new chief executive, Howard Brecher, called Mr. Eisenstadt and told him that his services were “no longer needed” and he was retiring, effective immediately, according to Mr. Eisenstadt. Yet the 87-year-old, who helped drive the Nazis out of France and Belgium as a member of the U.S Army’s 8th Armored Division, was in no mood to be shoved aside.
“I refuse to accept the explanation that I’m retiring,” Mr. Eisenstadt said. “I’m not retiring, and I don’t plan to retire. My mind is still sharp and wrapped up in my work. This is a very sad ending, and it really hurts.”
[via veryearly1]
Friday, November 27, 2009
Jim Rogers on gold and Geithner
Maria Bartiromo interviews Jimmy Rogers
Well, I own gold and I have for a while. How high can it go? I fully expect it to be over a couple thousand dollars an ounce sometime in the next decade—I didn't say the next month, I didn't say the next year, I said the next decade—because paper money around the world is very suspect. But right now everybody's bullish on it, so I don't like to buy things when that's happening. But I'm not selling under any circumstances.
Tim Geithner has been under attack lately. How's he doing?
Listen, I have been a critic for years. Geithner should never have been appointed to anything. He's been wrong about just about everything for 15 years.
Do you think he'll lose his job?
Of course he's going to lose his job, because as Mr. Obama realizes that Geithner doesn't know what he's doing, he's going to look for somebody else because he doesn't want to take the heat himself. So he's going to look to blame somebody, and the obvious person is Geithner.
[via maverick@investwise]
Well, I own gold and I have for a while. How high can it go? I fully expect it to be over a couple thousand dollars an ounce sometime in the next decade—I didn't say the next month, I didn't say the next year, I said the next decade—because paper money around the world is very suspect. But right now everybody's bullish on it, so I don't like to buy things when that's happening. But I'm not selling under any circumstances.
Tim Geithner has been under attack lately. How's he doing?
Listen, I have been a critic for years. Geithner should never have been appointed to anything. He's been wrong about just about everything for 15 years.
Do you think he'll lose his job?
Of course he's going to lose his job, because as Mr. Obama realizes that Geithner doesn't know what he's doing, he's going to look for somebody else because he doesn't want to take the heat himself. So he's going to look to blame somebody, and the obvious person is Geithner.
[via maverick@investwise]
Tuesday, November 24, 2009
existing home sales surge
Existing-home sales surged 10.1% month-over-month (m/m) to an annual rate of 6.10 million units in October. That was significantly better than expected as economists had only forecast a 2.3% gain to 5.70 million. At the same time, last month's data was revised lower, with September data now showing an 8.8% increase to 5.54 million units. Even the National Association of Realtors was surprised at the size of the gain with NAR's chief economist reporting "Many buyers have been rushing to beat the deadline for the first-time buyer tax credit that was scheduled to expire at the end of this month, and similarly robust sales may be occurring in November." Similarly, the NAR warned "With such a sale spike, a measurable decline should be anticipated in December and early next year before another surge in spring and early summer."
The report showed that strength was broad-based, with single-family home sales up 9.7% and multi-family sales rising 13.2%. The data also showed every region save one posting a double-digit gain in sales. The 1.6% increase in the West was the lone exception. Elsewhere in the report, distressed properties constituted 30% of sales nationwide during October, which weighed down the median existing-home price to $173,100 - 7.1% lower year-over-year (y/y). That decline in prices has driven affordability levels to all-time highs, with data back to the 1970s. The price-to-income ratio has also fallen below its historic trend line, which the NAR said will contribute to prices bottoming and even rising next year. Even inventory levels are beginning to look bullish. "In fact, low-end inventory has become very tight in many areas and in some cases buyers are becoming more aggressive," the NAR reported. Total housing inventory now represents a 7.0 month supply, the lowest level in over two-and-a-half years.
The stabilization of the housing market is one factor that could get the US consumer back on its feet sooner than expected. As Schwab's Director of Sector and Market Analysis, Brad Sorensen, CFA, points out in his Schwab Sector Views: Scaling Back, there are multiple reasons to be concerned about the health of the American consumer, but there are also reasons to be optimistic. Among the negative factors are an unemployment rate which is likely to move higher and the need for consumers to repair their personal balance sheets. Tighter credit conditions will also likely reduce consumers' ability to spend. However, Americans have a propensity to consume and have defied predictions of their shopping demise many times before. In addition, at the end of a year when American consumers have shown restraint in spending, it is not too difficult to imagine some pent-up demand being released during this time of the year-resulting in the potential for upside surprises. In the end, after taking into account all of these factors as well as the strong rally in cyclical areas of the market since March and resulting valuation of stocks in the sector, Brad feels a Marketperform rating of consumer stocks is appropriate. Read more at www.schwab.com/marketinsight.
[via Schwab Alerts]
The report showed that strength was broad-based, with single-family home sales up 9.7% and multi-family sales rising 13.2%. The data also showed every region save one posting a double-digit gain in sales. The 1.6% increase in the West was the lone exception. Elsewhere in the report, distressed properties constituted 30% of sales nationwide during October, which weighed down the median existing-home price to $173,100 - 7.1% lower year-over-year (y/y). That decline in prices has driven affordability levels to all-time highs, with data back to the 1970s. The price-to-income ratio has also fallen below its historic trend line, which the NAR said will contribute to prices bottoming and even rising next year. Even inventory levels are beginning to look bullish. "In fact, low-end inventory has become very tight in many areas and in some cases buyers are becoming more aggressive," the NAR reported. Total housing inventory now represents a 7.0 month supply, the lowest level in over two-and-a-half years.
The stabilization of the housing market is one factor that could get the US consumer back on its feet sooner than expected. As Schwab's Director of Sector and Market Analysis, Brad Sorensen, CFA, points out in his Schwab Sector Views: Scaling Back, there are multiple reasons to be concerned about the health of the American consumer, but there are also reasons to be optimistic. Among the negative factors are an unemployment rate which is likely to move higher and the need for consumers to repair their personal balance sheets. Tighter credit conditions will also likely reduce consumers' ability to spend. However, Americans have a propensity to consume and have defied predictions of their shopping demise many times before. In addition, at the end of a year when American consumers have shown restraint in spending, it is not too difficult to imagine some pent-up demand being released during this time of the year-resulting in the potential for upside surprises. In the end, after taking into account all of these factors as well as the strong rally in cyclical areas of the market since March and resulting valuation of stocks in the sector, Brad feels a Marketperform rating of consumer stocks is appropriate. Read more at www.schwab.com/marketinsight.
[via Schwab Alerts]
China a paper dragon?
The conventional wisdom in Washington and in most of the rest of the world is that the roaring Chinese economy is going to pull the global economy out of recession and back into growth. It’s China’s turn, the theory goes, as American consumers — who propelled the last global boom with their borrowing and spending ways — have begun to tighten their belts and increase savings rates.
The Chinese, with their unbridled capitalistic expansion propelled by a system they still refer to as “socialism with Chinese characteristics,” are still thriving, though, with annual gross domestic product growth of 8.9 percent in the third quarter and a domestic consumer market just starting to flex its enormous muscles.
But there’s a growing group of market professionals who see a different picture altogether. These self-styled China bears take the less popular view: that the much-vaunted Chinese economic miracle is nothing but a paper dragon. In fact, they argue that the Chinese have dangerously overheated their economy, building malls, luxury stores and infrastructure for which there is almost no demand, and that the entire system is teetering toward collapse.
The China bears could be dismissed as a bunch of cranks and grumps except for one member of the group: hedge fund investor Jim Chanos.
Chanos, a billionaire, is the founder of the investment firm Kynikos Associates and a famous short seller — an investor who scrutinizes companies looking for hidden flaws and then bets against those firms in the market.
Chanos and the other bears point to several key pieces of evidence that China is heading for a crash.
First, they point to the enormous Chinese economic stimulus effort — with the government spending $900 billion to prop up a $4.3 trillion economy. “Yet China’s economy, for all the stimulus it has received in 11 months, is underperforming,” Gordon Chang, author of “The Coming Collapse of China,” wrote in Forbes at the end of October. “More important, it is unlikely that [third-quarter] expansion was anywhere near the claimed 8.9 percent.”
Chang argues that inconsistencies in Chinese official statistics — like the surging numbers for car sales but flat statistics for gasoline consumption — indicate that the Chinese are simply cooking their books. He speculates that Chinese state-run companies are buying fleets of cars and simply storing them in giant parking lots in order to generate apparent growth.
And the bears also keep a close eye on anecdotal reports from the ground level in China, like a recent posting on a blog called The Peking Duck about shopping at Beijing’s “stunningly dysfunctional, catastrophic mall, called The Place.”
“I was shocked at what I saw,” the blogger wrote. “Fifty percent of the eateries in the basement were boarded up. The cheap food court, too, was gone, covered up with ugly blue boarding, making the basement especially grim and dreary. ... There is simply too much stuff, too many stores and no buyers.”
[via maverick@investwise]
The Chinese, with their unbridled capitalistic expansion propelled by a system they still refer to as “socialism with Chinese characteristics,” are still thriving, though, with annual gross domestic product growth of 8.9 percent in the third quarter and a domestic consumer market just starting to flex its enormous muscles.
But there’s a growing group of market professionals who see a different picture altogether. These self-styled China bears take the less popular view: that the much-vaunted Chinese economic miracle is nothing but a paper dragon. In fact, they argue that the Chinese have dangerously overheated their economy, building malls, luxury stores and infrastructure for which there is almost no demand, and that the entire system is teetering toward collapse.
The China bears could be dismissed as a bunch of cranks and grumps except for one member of the group: hedge fund investor Jim Chanos.
Chanos, a billionaire, is the founder of the investment firm Kynikos Associates and a famous short seller — an investor who scrutinizes companies looking for hidden flaws and then bets against those firms in the market.
Chanos and the other bears point to several key pieces of evidence that China is heading for a crash.
First, they point to the enormous Chinese economic stimulus effort — with the government spending $900 billion to prop up a $4.3 trillion economy. “Yet China’s economy, for all the stimulus it has received in 11 months, is underperforming,” Gordon Chang, author of “The Coming Collapse of China,” wrote in Forbes at the end of October. “More important, it is unlikely that [third-quarter] expansion was anywhere near the claimed 8.9 percent.”
Chang argues that inconsistencies in Chinese official statistics — like the surging numbers for car sales but flat statistics for gasoline consumption — indicate that the Chinese are simply cooking their books. He speculates that Chinese state-run companies are buying fleets of cars and simply storing them in giant parking lots in order to generate apparent growth.
And the bears also keep a close eye on anecdotal reports from the ground level in China, like a recent posting on a blog called The Peking Duck about shopping at Beijing’s “stunningly dysfunctional, catastrophic mall, called The Place.”
“I was shocked at what I saw,” the blogger wrote. “Fifty percent of the eateries in the basement were boarded up. The cheap food court, too, was gone, covered up with ugly blue boarding, making the basement especially grim and dreary. ... There is simply too much stuff, too many stores and no buyers.”
[via maverick@investwise]
Saturday, November 21, 2009
unemployment rate hits double digits
The unemployment rate has hit double digits for the first time since 1983 — and is likely to go higher. The 10.2 percent jobless rate for October shows how weak the economy remains even though it is growing. The rising jobless rate could threaten the recovery if it saps consumers' confidence and makes them more cautious about spending as the holiday season approaches.
The October unemployment rate — reflecting nearly 16 million jobless people — jumped from 9.8 percent in September, the Labor Department said Friday. The job losses occurred across most industries, from manufacturing and construction to retail and financial.
Economists say the unemployment rate could surpass 10.5 percent next year because employers are reluctant to hire.
President Barack Obama called the new jobs report another illustration of why much more work is needed to spur business creation and consumer spending. Noting legislation he's signing to provide additional unemployment benefits for laid-off workers, Obama said, "I will not rest until all Americans who want work can find work."
The October unemployment rate — reflecting nearly 16 million jobless people — jumped from 9.8 percent in September, the Labor Department said Friday. The job losses occurred across most industries, from manufacturing and construction to retail and financial.
Economists say the unemployment rate could surpass 10.5 percent next year because employers are reluctant to hire.
President Barack Obama called the new jobs report another illustration of why much more work is needed to spur business creation and consumer spending. Noting legislation he's signing to provide additional unemployment benefits for laid-off workers, Obama said, "I will not rest until all Americans who want work can find work."
Friday, November 20, 2009
back at 1100
The S&P 500 is back at 1100 more than 11 years after it first reached that level.
The biggest winners in that time frame were RIMM and Apple. The biggest losers were AIG and Eastman Kodak.
[via Free Speech]
The biggest winners in that time frame were RIMM and Apple. The biggest losers were AIG and Eastman Kodak.
[via Free Speech]
Saturday, November 14, 2009
the recession is over (?)
The United States has emerged from the longest economic contraction since World War II.
The nation’s gross domestic product expanded at an annual rate of 3.5 percent in the quarter that ended in September, matching its average growth rate of the last 80 years, according to the Commerce Department.
But government programs to encourage consumer spending on things like cars and houses are expiring, and employers remain reluctant to hire more workers, suggesting the recovery may not last, economists say.
The nation’s gross domestic product expanded at an annual rate of 3.5 percent in the quarter that ended in September, matching its average growth rate of the last 80 years, according to the Commerce Department.
But government programs to encourage consumer spending on things like cars and houses are expiring, and employers remain reluctant to hire more workers, suggesting the recovery may not last, economists say.
Tuesday, October 27, 2009
Zacks on growth and value
* Did you know that stocks with 'just' double-digit growth rates typically outperform stocks with triple-digit growth rates?
* Did you also know that stocks with crazy high growth rates test almost as poorly as those with the lowest growth rates?
Did your last loser have a spectacular growth rate?
If so, and it still got crushed, would you have picked it if you knew that stocks with the highest growth rates have spotty track records?
It seems logical to think that companies with the highest growth rates would do the best. But it doesn't always turn out to be the case.
One explanation for this is that sky high growth rates are unsustainable. And the moment a more normal (albeit still good) growth rate emerges, the stock gets a dose of reality as well.
Instead, I have found that comparing a stock to the median growth rate for its industry is the best way to find solid outperformers with a lesser chance to disappoint.
* Did you know that the top performing stocks each year will usually see their P/E ratios more than double from where it started?
* Did you also know that, historically, most of the best performers began their runs with P/Es over the 'magic' number of a P/E ratio of 20?
* And did you know that an even greater majority of the top performers finished with P/E ratios of well over 20?
If you only confine yourself to stocks with P/Es under 20, you'll be consistently keeping yourself from getting in on some of the best performing stocks each year.
Moreover, knowing that the top performers will typically see their P/E ratios rise (more than 100%) during their move, you'd be getting out the moment those stocks get above 20.
So many people I speak to believe that a P/E ratio of less than 20 is the key to success. But statistics prove otherwise.
Don't get me wrong, lower P/E ratios in general are a good thing. But since different industries have different P/E ratios, it makes sense to do relative comparisons.
* Did you also know that stocks with crazy high growth rates test almost as poorly as those with the lowest growth rates?
Did your last loser have a spectacular growth rate?
If so, and it still got crushed, would you have picked it if you knew that stocks with the highest growth rates have spotty track records?
It seems logical to think that companies with the highest growth rates would do the best. But it doesn't always turn out to be the case.
One explanation for this is that sky high growth rates are unsustainable. And the moment a more normal (albeit still good) growth rate emerges, the stock gets a dose of reality as well.
Instead, I have found that comparing a stock to the median growth rate for its industry is the best way to find solid outperformers with a lesser chance to disappoint.
* Did you know that the top performing stocks each year will usually see their P/E ratios more than double from where it started?
* Did you also know that, historically, most of the best performers began their runs with P/Es over the 'magic' number of a P/E ratio of 20?
* And did you know that an even greater majority of the top performers finished with P/E ratios of well over 20?
If you only confine yourself to stocks with P/Es under 20, you'll be consistently keeping yourself from getting in on some of the best performing stocks each year.
Moreover, knowing that the top performers will typically see their P/E ratios rise (more than 100%) during their move, you'd be getting out the moment those stocks get above 20.
So many people I speak to believe that a P/E ratio of less than 20 is the key to success. But statistics prove otherwise.
Don't get me wrong, lower P/E ratios in general are a good thing. But since different industries have different P/E ratios, it makes sense to do relative comparisons.
Saturday, October 24, 2009
lessons from the bear market
Jason Zweig's latest book, Your Money and Your Brain, looks at how the brain responds when making real-life financial decisions. In an interview that appeared on Morningstar.com last week, Zweig, who writes The Intelligent Investor for The Wall Street Journal, shared some tips for overcoming your brain's worst impulses. In part two of that interview, he shares some wisdom for making good decisions during times of financial crisis.
Let's think back to October or November of last year or March of this year, when the Dow seemed to be headed toward 6,000, and people were just terrified. There's no doubt that millions of investors, both retail and professional alike, were acting out of sheer uncontrolled fear. And the level of stress that investors felt was unbelievable. And when people are afraid, and when you're feeling stress, not stress in the pop psychology sense but stress in the physiological sense, when your blood pressure goes up, you're sweating, your heart is racing, your hands are shaking, you can't sleep, and you're on the verge of depression, and you're snapping at your family and kicking your dog, people make bad decisions. And they make impulsive decisions, they make big decisions when they should be making small ones. Instead of making incremental adjustments to portfolios, instead of rebalancing at the margin, people bailed out of asset classes entirely or just moved completely into cash. The other thing that neuroeconomics suggests goes on in people's minds in a time of market panic is the automatic perception of illusory patterns--detecting "trends" in random data that simply are not there. Things that seem to be predictable loom much more important in people's minds. People develop a belief that the future is more knowable. That's stronger in a time of extreme uncertainty.
So what was I seeing in my e-mails were hundreds of messages from people about how the world was coming to an end, quite literally. "We're going into another Great Depression." "The financial markets will cease to function completely." "I'm stocking up on granola bars and bottled water and extra cartridges for my gun." I got any number of "I'm going off the grid" e-mails. And the thing that's surprising to me is not that all of that happened, because that's exactly the sort of thing I would have predicted. What has surprised me is how quickly the mindset has shifted. And now it seems that people have completely forgotten how they felt a few months ago. And that's very troubling to me. It suggests to me that we're nowhere near out of the woods. I do not tend to make market forecasts of any kind, but that worries me so much that I think we're probably in for another big surprise before we have a full recovery.
Let's think back to October or November of last year or March of this year, when the Dow seemed to be headed toward 6,000, and people were just terrified. There's no doubt that millions of investors, both retail and professional alike, were acting out of sheer uncontrolled fear. And the level of stress that investors felt was unbelievable. And when people are afraid, and when you're feeling stress, not stress in the pop psychology sense but stress in the physiological sense, when your blood pressure goes up, you're sweating, your heart is racing, your hands are shaking, you can't sleep, and you're on the verge of depression, and you're snapping at your family and kicking your dog, people make bad decisions. And they make impulsive decisions, they make big decisions when they should be making small ones. Instead of making incremental adjustments to portfolios, instead of rebalancing at the margin, people bailed out of asset classes entirely or just moved completely into cash. The other thing that neuroeconomics suggests goes on in people's minds in a time of market panic is the automatic perception of illusory patterns--detecting "trends" in random data that simply are not there. Things that seem to be predictable loom much more important in people's minds. People develop a belief that the future is more knowable. That's stronger in a time of extreme uncertainty.
So what was I seeing in my e-mails were hundreds of messages from people about how the world was coming to an end, quite literally. "We're going into another Great Depression." "The financial markets will cease to function completely." "I'm stocking up on granola bars and bottled water and extra cartridges for my gun." I got any number of "I'm going off the grid" e-mails. And the thing that's surprising to me is not that all of that happened, because that's exactly the sort of thing I would have predicted. What has surprised me is how quickly the mindset has shifted. And now it seems that people have completely forgotten how they felt a few months ago. And that's very troubling to me. It suggests to me that we're nowhere near out of the woods. I do not tend to make market forecasts of any kind, but that worries me so much that I think we're probably in for another big surprise before we have a full recovery.
Roubini on gold
I don’t believe in gold. Gold can go up for only two reasons. [One is] inflation, and we are in a world where there are massive amounts of deflation because of a glut of capacity, and demand is weak, and there’s slack in the labor markets with unemployment peeking above 10 percent in all the advanced economies. So there’s no inflation, and there’s not going to be for the time being.
The only other case in which gold can go higher with deflation is if you have Armageddon, if you have another depression. But we’ve avoided that tail risk as well. So all the gold bugs who say gold is going to go to $1,500, $2,000, they’re just speaking nonsense. Without inflation, or without a depression, there’s nowhere for gold to go. Yeah, it can go above $1,000, but it can’t move up 20-30 percent unless we end up in a world of inflation or another depression. I don’t see either of those being likely for the time being. Maybe three or four years from now, yes. But not anytime soon.
[via bdparts]
The only other case in which gold can go higher with deflation is if you have Armageddon, if you have another depression. But we’ve avoided that tail risk as well. So all the gold bugs who say gold is going to go to $1,500, $2,000, they’re just speaking nonsense. Without inflation, or without a depression, there’s nowhere for gold to go. Yeah, it can go above $1,000, but it can’t move up 20-30 percent unless we end up in a world of inflation or another depression. I don’t see either of those being likely for the time being. Maybe three or four years from now, yes. But not anytime soon.
[via bdparts]
Friday, October 16, 2009
jobless claims
[10/15/09 Schwab Alerts] Weekly initial jobless claims fell by 10,000 to 514,000, versus last week's figure that was upwardly revised by 3,000 to 524,000. The Bloomberg consensus called for claims to reach 520,000. The four-week moving average, considered a smoother look at the trend in claims, declined by 9,000 to 531,500. Continuing claims also fell, declining by 75,000 to 5,992,000, versus the forecast of 6,000,000.
[10/8/09 Schwab Alerts] Weekly initial jobless claims fell by 33,000 to 521,000, versus last week's figure that was upwardly revised by 3,000 to 554,000. The Bloomberg consensus called for claims to reach 540,000. The four-week moving average, considered a smoother look at the trend in claims, decreased by 9,000 to 539,750. Continuing claims also fell, declining by 72,000 to 6,040,000, versus the forecast of 6,105,000.
[10/8/09 Schwab Alerts] Weekly initial jobless claims fell by 33,000 to 521,000, versus last week's figure that was upwardly revised by 3,000 to 554,000. The Bloomberg consensus called for claims to reach 540,000. The four-week moving average, considered a smoother look at the trend in claims, decreased by 9,000 to 539,750. Continuing claims also fell, declining by 72,000 to 6,040,000, versus the forecast of 6,105,000.
Wednesday, October 14, 2009
Dow breaks 10,000
The Dow Jones Industrial Average ($INDU) closed above 10,000 today for the first time in about a year, as all three major indexes hit new highs for 2009.
The rally was prompted by strong earnings from banking giant JPMorgan Chase (JPM) and Intel (INTC), and it reflects a strongly held view that an economic recovery is emerging in the United States and around the world.
The Dow finished up 145 points, or 1.5%, to 10,016. That is its best finish since Oct. 3, 2008, in the midst of last year's financial collapse. The Standard & Poor's 500 Index ($INX) was up 19 points, or 1.8%, to 1,092, also the best finish for the broad-based index since Oct. 3, 2008. The Nasdaq Composite Index ($COMPX) was up 32 points, or 1.5%, to 2,172. That's the best finish for the index since Sept. 26, 2008.
The Dow is now up 53% since bottoming on March 9. The S&P 500 is up 61%, and the Nasdaq
Bernanke to tighten (at some point)
Federal Reserve Chairman Ben Bernanke spoke yesterday evening at a Board of Governors conference in Washington, giving an update on the Fed's balance sheet. The Fed Chief reiterated the Federal Open Market Committee's (FOMC) latest policy statement last month that its accommodative policies will likely be warranted for an extended period. But Bernanke pointed out that, "At some point, however, as economic recovery takes hold, we will need to tighten monetary policy to prevent the emergence of an inflation problem down the road."
[Schwab Alerts, 10/9/09]
[Schwab Alerts, 10/9/09]
Wednesday, October 07, 2009
gold at record high
Gold surged again today, hitting a record $1,049.70 an ounce before falling back to $1,044.40. The intraday hight and the close topped Tuesday's record of $1043.45 an ounce.
Demand for gold has been rising as U.S. government debt reaches record levels and the Federal Reserve keeps interest rates at record lows near zero percent. A weak dollar has also contributed to gold's recent surge.
Despite the record price of gold, the commodity is still well below its inflation-adjusted record of about $2,200, set in January 1980, when gold hit $850 an ounce.
Demand for gold has been rising as U.S. government debt reaches record levels and the Federal Reserve keeps interest rates at record lows near zero percent. A weak dollar has also contributed to gold's recent surge.
Despite the record price of gold, the commodity is still well below its inflation-adjusted record of about $2,200, set in January 1980, when gold hit $850 an ounce.
Tuesday, October 06, 2009
Three Bears
Oct. 5 (Bloomberg) -- New York University Professor Nouriel Roubini said stock markets may drop and billionaire George Soros warned the “bankrupt” U.S. banking system will hamper its economy, highlighting doubts about the sustainability of the global recovery.
“Markets have gone up too much, too soon, too fast,” Roubini, who accurately predicted the financial crisis, said in an interview in Istanbul on Oct. 3. U.S. stocks may suffer a “major decline” after climbing to the highest levels in almost a year two weeks ago, according to technical analyst Robert Prechter, founder of Elliott Wave International Inc.
U.S. consumers are “overdebted” and the country’s banking system has been “basically bankrupt,” Soros said in Istanbul today. “The United States has a long way to go.”
“Stocks are very overvalued,” Prechter, who advised betting against U.S. equities three months before the market peaked in October 2007, said in an Oct. 1 telephone interview. “Stocks peaked in September and are back in a bear market.”
The S&P 500 will probably fall “substantially below” 676.53, the 12-year low reached on March 9, he said. His projection implies a drop of more than 34 percent from last week’s close of 1025.21. It rose to 1031.77 at 10:05 a.m. in New York.
[via bdparts]
“Markets have gone up too much, too soon, too fast,” Roubini, who accurately predicted the financial crisis, said in an interview in Istanbul on Oct. 3. U.S. stocks may suffer a “major decline” after climbing to the highest levels in almost a year two weeks ago, according to technical analyst Robert Prechter, founder of Elliott Wave International Inc.
U.S. consumers are “overdebted” and the country’s banking system has been “basically bankrupt,” Soros said in Istanbul today. “The United States has a long way to go.”
“Stocks are very overvalued,” Prechter, who advised betting against U.S. equities three months before the market peaked in October 2007, said in an Oct. 1 telephone interview. “Stocks peaked in September and are back in a bear market.”
The S&P 500 will probably fall “substantially below” 676.53, the 12-year low reached on March 9, he said. His projection implies a drop of more than 34 percent from last week’s close of 1025.21. It rose to 1031.77 at 10:05 a.m. in New York.
[via bdparts]
Saturday, October 03, 2009
Living Legends
No phony newsreel footage is necessary to convey the wisdom of two living legends who thrived through the granddaddy of them all, the Great Crash of 1929. Both Irving Kahn, the oldest active money manager on Wall Street at 103, and 106 year-old Roy Neuberger, saw the recent shakeout in global markets as just another opportunity to buy good companies cheaply while competitors a third their age rushed for the exits.
Kahn says he ignores market gyrations and typically holds stocks for at least three years, sometimes as much as 15, until value is realised. His firm, Kahn Brothers, compares its philosophy to tending an orchard with different types of fruit, some of which ripen more slowly than others. If that sounds suspiciously like the father of value investing, Benjamin Graham, it is no accident – Kahn was Graham’s first teaching assistant and helped him with his 1934 classic Security Analysis. Like Graham, Kahn seeks out unloved and obscure stocks, eschewing highfliers.
“Never buy popular stocks, except maybe in a depression,” he warns.
Neuberger, and the firm he founded, Neuberger Berman, hew to similar principles. He retired at age 99 and is now too frail to be interviewed. His 68-year-old protégé Marvin Schwartz, who joined the firm in 1961, consults with him regularly though and credits Neuberger with providing appropriate perspective in hard times such as these.
“In almost each and every instance, he advised us to buy in what would be a passing negative period,” says Schwartz.
Shareholders of Berkshire Hathaway hoping that the 79-year-old Oracle of Omaha will achieve longevity on par with Messrs Kahn and Neuberger have cause for cheer. Optimistic value-seekers have remarkable staying-power. Philip Carret and Philip Fisher, two of Buffett’s key influences aside from Graham and among the most successful investors of all-time, died at age 101 and 96, respectively. Another legendary investor, Sir John Templeton, remained active until his death last summer at age 95 and is credited with two of the great contrarian investing quotes: “Invest at the point of maximum pessimism” and “the four most dangerous words in investing are ‘it’s different this time.’”
[via iluvbabyb]
Kahn says he ignores market gyrations and typically holds stocks for at least three years, sometimes as much as 15, until value is realised. His firm, Kahn Brothers, compares its philosophy to tending an orchard with different types of fruit, some of which ripen more slowly than others. If that sounds suspiciously like the father of value investing, Benjamin Graham, it is no accident – Kahn was Graham’s first teaching assistant and helped him with his 1934 classic Security Analysis. Like Graham, Kahn seeks out unloved and obscure stocks, eschewing highfliers.
“Never buy popular stocks, except maybe in a depression,” he warns.
Neuberger, and the firm he founded, Neuberger Berman, hew to similar principles. He retired at age 99 and is now too frail to be interviewed. His 68-year-old protégé Marvin Schwartz, who joined the firm in 1961, consults with him regularly though and credits Neuberger with providing appropriate perspective in hard times such as these.
“In almost each and every instance, he advised us to buy in what would be a passing negative period,” says Schwartz.
Shareholders of Berkshire Hathaway hoping that the 79-year-old Oracle of Omaha will achieve longevity on par with Messrs Kahn and Neuberger have cause for cheer. Optimistic value-seekers have remarkable staying-power. Philip Carret and Philip Fisher, two of Buffett’s key influences aside from Graham and among the most successful investors of all-time, died at age 101 and 96, respectively. Another legendary investor, Sir John Templeton, remained active until his death last summer at age 95 and is credited with two of the great contrarian investing quotes: “Invest at the point of maximum pessimism” and “the four most dangerous words in investing are ‘it’s different this time.’”
[via iluvbabyb]
Tuesday, September 29, 2009
home price declines slowing
Home prices in 20 major markets fell 13% in July from a year earlier, but, increasingly, it appears that bottoms were established in those markets in April.
The S&P/Case-Shiller 20-city home price index report was better than economists' expectations of a 14.2% decline from a year earlier, and the smallest decline in 17 months. The index has fallen every month since January 2007.
Home prices in the 20 markets actually moved up 1.6% in July from June, the fourth month of gains, the report said. But don't forget: July is one of the strongest months of the year.
Homebuilding stocks moved higher on the news.
The S&P/Case-Shiller 20-city home price index report was better than economists' expectations of a 14.2% decline from a year earlier, and the smallest decline in 17 months. The index has fallen every month since January 2007.
Home prices in the 20 markets actually moved up 1.6% in July from June, the fourth month of gains, the report said. But don't forget: July is one of the strongest months of the year.
Homebuilding stocks moved higher on the news.
Peter Schiff on G20
As another G20 meeting rolls around, this time on home soil, the time comes once again for the economically curious but politically unconnected to wonder what is really happening behind closed doors.
Everyone agrees that the principal agenda item in Pittsburgh will be the need to rein in the 'global imbalances' that created the late economic crisis. Everyone also agrees that these imbalances involve too much spending and borrowing by Americans and too little of both by the Chinese and other developing nations. In his remarks this week at the United Nations, President Obama used his peerless rhetorical skill to frame the issues clearly and plainly. Noting that a return to pre-crisis economics is impossible, the president assured the world that his administration will pursue policies to increase savings and decrease spending at home and challenged his Chinese counterparts to enact measures with the opposite effect in their own country.
While this is roughly what needs to happen, President Obama is actually doing everything in his power to prevent it. In point of fact, every policy move undertaken by his administration has exacerbated the very imbalances he supposedly wants to curtail. To so seamlessly profess one goal while simultaneously undermining it is an impressive piece of political theater.
What exactly are the federal fiscal stimuli other than deliberate, but clumsy, efforts to get people, companies, and governments to spend money they don't have? Programs like tax credits for new homebuyers or 'cash for clunkers' are intended to encourage consumers to spend money that they otherwise might have saved.
In 2009, despite the tilted playing field, the American people have heroically managed to increase their savings (although clearly not as much as they would have in a free market). But President Obama's runaway deficit spending is undermining their efforts. The simple truth is that government debt is our debt. So if a family manages, at some cost to their lifestyle, to squirrel away an extra $1,000 in saving this year, but the government adds $20,000 in new debt per household (each family's approximate share of the $1.8 trillion fiscal 2009 deficit), that family ends up owing $19,000 more than they did at the beginning of the year!
So much for our end of the bargain. How about on the other side of the Pacific? Will the Chinese restore balance by increasing their spending? How can they while they are lending us all their money? Remember, any money the Chinese spend is money they cannot loan to us. So, if China really wanted to spur domestic consumption, the best way to do so would be to stop buying our debt. Even better, they could sell Treasuries they already own and distribute the proceeds to their citizens to spend.
However, the Obama administration is heavily lobbying the Chinese to get them to step up to the plate and buy record amounts of new Treasury debt. Obama cannot have it both ways. He cannot claim he wants the Chinese to spend more, but then beg the Chinese government to take money away from Chinese consumers and loan it to the United States Treasury.
In the end, Obama will get precisely what he publicly claims to desire but privately dreads. The Chinese government will come to its senses and stop buying Treasuries. This will cause the U.S. dollar to collapse, but it will also allow Chinese citizens to fully enjoy the fruits of their labor.
Once the Chinese begin consuming more of their own products, those products will no longer be available to Americans. Once they start spending more of their incomes on themselves, those funds will no longer be available for us to borrow. Unfortunately, that is when our real economic crisis will begin.
-- Peter Schiff [via pbo@chucks_angels, 9/27/09]
Everyone agrees that the principal agenda item in Pittsburgh will be the need to rein in the 'global imbalances' that created the late economic crisis. Everyone also agrees that these imbalances involve too much spending and borrowing by Americans and too little of both by the Chinese and other developing nations. In his remarks this week at the United Nations, President Obama used his peerless rhetorical skill to frame the issues clearly and plainly. Noting that a return to pre-crisis economics is impossible, the president assured the world that his administration will pursue policies to increase savings and decrease spending at home and challenged his Chinese counterparts to enact measures with the opposite effect in their own country.
While this is roughly what needs to happen, President Obama is actually doing everything in his power to prevent it. In point of fact, every policy move undertaken by his administration has exacerbated the very imbalances he supposedly wants to curtail. To so seamlessly profess one goal while simultaneously undermining it is an impressive piece of political theater.
What exactly are the federal fiscal stimuli other than deliberate, but clumsy, efforts to get people, companies, and governments to spend money they don't have? Programs like tax credits for new homebuyers or 'cash for clunkers' are intended to encourage consumers to spend money that they otherwise might have saved.
In 2009, despite the tilted playing field, the American people have heroically managed to increase their savings (although clearly not as much as they would have in a free market). But President Obama's runaway deficit spending is undermining their efforts. The simple truth is that government debt is our debt. So if a family manages, at some cost to their lifestyle, to squirrel away an extra $1,000 in saving this year, but the government adds $20,000 in new debt per household (each family's approximate share of the $1.8 trillion fiscal 2009 deficit), that family ends up owing $19,000 more than they did at the beginning of the year!
So much for our end of the bargain. How about on the other side of the Pacific? Will the Chinese restore balance by increasing their spending? How can they while they are lending us all their money? Remember, any money the Chinese spend is money they cannot loan to us. So, if China really wanted to spur domestic consumption, the best way to do so would be to stop buying our debt. Even better, they could sell Treasuries they already own and distribute the proceeds to their citizens to spend.
However, the Obama administration is heavily lobbying the Chinese to get them to step up to the plate and buy record amounts of new Treasury debt. Obama cannot have it both ways. He cannot claim he wants the Chinese to spend more, but then beg the Chinese government to take money away from Chinese consumers and loan it to the United States Treasury.
In the end, Obama will get precisely what he publicly claims to desire but privately dreads. The Chinese government will come to its senses and stop buying Treasuries. This will cause the U.S. dollar to collapse, but it will also allow Chinese citizens to fully enjoy the fruits of their labor.
Once the Chinese begin consuming more of their own products, those products will no longer be available to Americans. Once they start spending more of their incomes on themselves, those funds will no longer be available for us to borrow. Unfortunately, that is when our real economic crisis will begin.
-- Peter Schiff [via pbo@chucks_angels, 9/27/09]
how the market works
Once upon a time in a village, a man appeared and announced to the villagers that he would buy monkeys for $10 each.
The villagers seeing that there were many monkeys around, went out to the forest, and started catching them. The man bought thousands at $10 and as supply started to diminish, the villagers stopped their effort. He further announced that he would now buy at $20. This renewed the efforts of the villagers and they started catching
monkeys again.
Soon the supply diminished even further and people started going back to their farms. The offer increased to $25 each and the supply of monkeys became so little that it was an effort to even see a monkey, let alone catch it!
The man now announced that he would buy monkeys at $50! However, since he had to go to the city on some business, his assistant would now buy on behalf of him.
In the absence of the man, the assistant told the villagers. "Look at all these monkeys in the big cage that the man has collected. I will sell them to you at $35 and when the man returns from the city, you can sell them to him for $50 each."
The villagers rounded up with all their savings and bought all the monkeys. Then they never saw the man nor his assistant, only monkeys everywhere!
Now you have a better understanding of how the stock market works.
[Duke@chucks_angels, 2/24/09]
The villagers seeing that there were many monkeys around, went out to the forest, and started catching them. The man bought thousands at $10 and as supply started to diminish, the villagers stopped their effort. He further announced that he would now buy at $20. This renewed the efforts of the villagers and they started catching
monkeys again.
Soon the supply diminished even further and people started going back to their farms. The offer increased to $25 each and the supply of monkeys became so little that it was an effort to even see a monkey, let alone catch it!
The man now announced that he would buy monkeys at $50! However, since he had to go to the city on some business, his assistant would now buy on behalf of him.
In the absence of the man, the assistant told the villagers. "Look at all these monkeys in the big cage that the man has collected. I will sell them to you at $35 and when the man returns from the city, you can sell them to him for $50 each."
The villagers rounded up with all their savings and bought all the monkeys. Then they never saw the man nor his assistant, only monkeys everywhere!
Now you have a better understanding of how the stock market works.
[Duke@chucks_angels, 2/24/09]
Friday, September 25, 2009
existing home sales fall
Existing home sales fell 2.7% month-over-month (m/m) to an annual rate of 5.1 million units, breaking a four-straight monthly streak of increases, and the report was disappointing relative to the 2.1% increase to an annual rate of 5.35 million units expected by a survey of economists conducted by Bloomberg. Positively, this marks the second month of year-over-year increases, at 3.4% for August. Single-family home sales decreased 2.8%, while multi-family sales fell 1.6%. Distressed properties and the shift to the low-end of the market continue to weigh down the median existing-home price, which fell 12.5% year-over-year (y/y) in August to $177,700, but the pace of price declines has been moderating in recent months.
[Schwab Alerts, 9/24/09]
***
Later in morning action, August existing home sales will be released, and are forecast to increase 2.1% to an annual rate of 5.35 million units, extending the upward trend to five months. July data showed the first year-over-year increase since November 2005, and the first four-straight monthly rise in five years.
[Schwab Alerts, 9/24/09]
***
Later in morning action, August existing home sales will be released, and are forecast to increase 2.1% to an annual rate of 5.35 million units, extending the upward trend to five months. July data showed the first year-over-year increase since November 2005, and the first four-straight monthly rise in five years.
Wednesday, September 23, 2009
growth stocks in the last decade
When you ask most investors for their favorite stocks, you'll rarely hear them share a blue-chip name like Johnson & Johnson, Kraft Foods or Wal-Mart. Instead they will tell you about some amazing growth stock that will be the next Google, Microsoft or Apple.
These investors believe that by simply buying stocks with the greatest earnings growth potential they will make money. Sadly, our research clearly shows this not to be true...not even close.
our research details beyond a shadow of a doubt the vast underperformance of growth stocks over the past decade. Here are the results.
Stocks with the lowest projected growth rates actually generated the highest return of +5.4% per year. Yes, I know that doesn't sound like much, but remember the average return of the S&P 500 over that stretch was an anemic -3.3% thanks to 2 ferocious bear markets.
Each level of additional earnings growth came with decreasing levels of profits for investors. As we look at the most aggressive growth stocks, with 30%+ expected earnings growth, we find an embarrassingly low -9.7% return.
[Yeah, but how did they do in the previous decades? And overall??]
These investors believe that by simply buying stocks with the greatest earnings growth potential they will make money. Sadly, our research clearly shows this not to be true...not even close.
our research details beyond a shadow of a doubt the vast underperformance of growth stocks over the past decade. Here are the results.
| Projected Earnings Growth Rate | *Annualized % Return |
| 0 - 10% | 5.4% |
| 10 - 20% | 2.6% |
| 20 - 30% | -0.2% |
| 30%+ | -9.7% |
| S&P 500 | -3.3% |
*The study had a 12-week rebalancing of stocks between 1/1/2000 and 9/11/2009
Stocks with the lowest projected growth rates actually generated the highest return of +5.4% per year. Yes, I know that doesn't sound like much, but remember the average return of the S&P 500 over that stretch was an anemic -3.3% thanks to 2 ferocious bear markets.
Each level of additional earnings growth came with decreasing levels of profits for investors. As we look at the most aggressive growth stocks, with 30%+ expected earnings growth, we find an embarrassingly low -9.7% return.
[Yeah, but how did they do in the previous decades? And overall??]
Tuesday, September 22, 2009
James Grant: From Bear to Bull
As if they really knew, leading economists predict that recovery from our Great Recession will be plodding, gray and jobless. But they don't know, and can't. The future is unfathomable.
Not famously a glass half-full kind of fellow, I am about to propose that the recovery will be a bit of a barn burner. Not that I can really know, either, the future being what it is. However, though I can't predict, I can guess. No, not "guess." Let us say infer.
Not famously a glass half-full kind of fellow, I am about to propose that the recovery will be a bit of a barn burner. Not that I can really know, either, the future being what it is. However, though I can't predict, I can guess. No, not "guess." Let us say infer.
Thursday, September 17, 2009
hedge funds in 2008
How'd they do?
2008 was a rough year for hedge funds, as evidenced by their year-end performances listed below.
[via B Johnson, 2/19/09]
2008 was a rough year for hedge funds, as evidenced by their year-end performances listed below.
[via B Johnson, 2/19/09]
Monday, September 14, 2009
Doug Kass' 20 Surprises for 2009
Though continuing on CNBC, Jim "El Capitan" Cramer announces his own reality show that will air on NBC in the fall. At the time his reality show premieres, he also writes a new book, Stay Mad for Life: How to Prosper From a Buy/Hold Investment Strategy. Dr. Nouriel Roubini continues to talk depression, but the price of his speaking engagements are cut in half. He writes a new book, The New Depression: How Leverage's Long Tail Will Result in Bread Lines. "Kudlow & Company's" Larry Kudlow proclaims that it's time to harvest the "mustard seeds" of growth and, in an admission of the Democrats' growing economic successes, officially leaves the ranks of the Republican party and returns to his Democratic roots. Yale's Dr. Robert Shiller adopts a variant and positive view on housing and the economy, joining the bullish ranks, and writes a new book, The New Financial Order: Economic Opportunity in the 21st Century.
Dow 14000 (in three years says Markman)
It's been exactly a year since the government kicked a smoldering financial crisis into a roaring blaze by letting Lehman Brothers (LEHMQ, news, msgs) collapse. Observers this week are memorializing the mistake, but investors need to look forward -- and what they should see is that the government's later reaction to its error may have actually laid the groundwork for the greatest bull market of the decade.
For while it seems unlikely and irrational in the context of all the lousy economic news you see right now, stocks are well on their way to recovering from the Lehman jolt and ambling with all deliberate speed toward all-time highs. And they don't really care if you believe it or not.
Dow 14,000? Maybe not next week. But in three years? Not a problem.
The signs are abundant, if you know where to look: in the corporate credit markets, in employment trends, in consumer credit trends, in government statements and in corporate revenue trends. You don't need to be a statistician or an insider to see them, but you do need to keep an open mind to see why the 30 goliaths of the Dow Jones Industrial Average ($INDU), companies such as Caterpillar (CAT, news, msgs), Intel (INTC, news, msgs), Bank of America (BAC, news, msgs) and Boeing (BA, news, msgs), could see their stocks rise 15% a year for three years.
For while it seems unlikely and irrational in the context of all the lousy economic news you see right now, stocks are well on their way to recovering from the Lehman jolt and ambling with all deliberate speed toward all-time highs. And they don't really care if you believe it or not.
Dow 14,000? Maybe not next week. But in three years? Not a problem.
The signs are abundant, if you know where to look: in the corporate credit markets, in employment trends, in consumer credit trends, in government statements and in corporate revenue trends. You don't need to be a statistician or an insider to see them, but you do need to keep an open mind to see why the 30 goliaths of the Dow Jones Industrial Average ($INDU), companies such as Caterpillar (CAT, news, msgs), Intel (INTC, news, msgs), Bank of America (BAC, news, msgs) and Boeing (BA, news, msgs), could see their stocks rise 15% a year for three years.
Thursday, September 10, 2009
What's the deal with Dennis Kneale?
What's the deal with Dennis Kneale's hair? He always look to me like he just woke up.
(Then again, I should talk..)
(Then again, I should talk..)
Tuesday, September 01, 2009
are you richer than average?
If all the money in the world were redistributed so that everyone had the same amount, what would it be?
The global money supply is about $60 trillion. (Economists call this figure the M3 value; it includes much more than currency.) Say that we take it all—which means that you and Bill Gates would have nothing in the bank—and then distribute it equally among every individual in the world, about 6.8 billion people. Each man, woman, and child would receive about $9000. So, if your household now has less than $9000 per person, you would gain. If you have more, you would lose.
-- Ask Marilyn
The global money supply is about $60 trillion. (Economists call this figure the M3 value; it includes much more than currency.) Say that we take it all—which means that you and Bill Gates would have nothing in the bank—and then distribute it equally among every individual in the world, about 6.8 billion people. Each man, woman, and child would receive about $9000. So, if your household now has less than $9000 per person, you would gain. If you have more, you would lose.
-- Ask Marilyn
pluralistic ignorance
Psychologists have an explanation for why crowds are prone to do stupid things at crucial moments. It can be action or inaction. But studies show people look to the actions of others to determine what the correct course of action is in an uncertain situation. It's called social proof. You don't want to look like an idiot, so you wait to see what everyone else is doing and go along.
If everyone's running up the street bashing windows, you'll experience pressure to join in. On the other hand, if, say, everyone is buying stocks because no one appears to be concerned that they are expensive, you'll experience subtle pressure to do the same.
In evolutionary terms, doing what other people are doing is generally a good strategy. It saves you the time and energy of thinking about the decision yourself. And you have to assume that they probably wouldn't be doing it if it didn't promote their survival in some way.
The shrinks call this phenomenon "pluralistic ignorance." We were reading about it last night over cocktails at Barney Allen's, right next door to our new head quarters in the heart of St. Kilda. It made a lot of sense, at least if you're trying to explain why so many people do so little when they have so much to lose.
[via investwise]
If everyone's running up the street bashing windows, you'll experience pressure to join in. On the other hand, if, say, everyone is buying stocks because no one appears to be concerned that they are expensive, you'll experience subtle pressure to do the same.
In evolutionary terms, doing what other people are doing is generally a good strategy. It saves you the time and energy of thinking about the decision yourself. And you have to assume that they probably wouldn't be doing it if it didn't promote their survival in some way.
The shrinks call this phenomenon "pluralistic ignorance." We were reading about it last night over cocktails at Barney Allen's, right next door to our new head quarters in the heart of St. Kilda. It made a lot of sense, at least if you're trying to explain why so many people do so little when they have so much to lose.
[via investwise]
pending home sales
pending home sales jumped again, rising 3.6% in July to the highest level since June 2007, well above the 1.5% forecasted rise, and June's 3.6% increase was left unrevised. Pending home sales typically lead existing home sales by a month or two and have gained ground for a sixth-straight month. The momentum in pending home sales has not translated fully to a similar increase in existing home sales, but existing home sales have posted four-straight months of increases to suggest a bottom in the housing sector-a key cog in the recovery machine-adding to the argument the economy may be in recovery mode. Treasuries remain mixed but have moved lower on the mid-to-long end of the curve following the manufacturing and housing data.
[via Schwab Alerts]
[via Schwab Alerts]
Thursday, August 27, 2009
A mathematician, an accountant and an economist
A mathematician, an accountant and an economist apply for the same
job.
The interviewer calls in the mathematician and asks "What do two plus two equal?" The mathematician replies "Four." The interviewer asks "Four, exactly?" The mathematician looks at the interviewer incredulously and says "Yes, four, exactly."
Then the interviewer calls in the accountant and asks the same question "What do two plus two equal?" The accountant says "On average, four - give or take ten percent, but on average, four."
Then the interviewer calls in the economist and poses the same question "What do two plus two equal?" The economist gets up, locks the door, closes the shade, sits down next to the interviewer and says, "What do you want it to equal"?
[via web_rules, 1/30/09]
job.
The interviewer calls in the mathematician and asks "What do two plus two equal?" The mathematician replies "Four." The interviewer asks "Four, exactly?" The mathematician looks at the interviewer incredulously and says "Yes, four, exactly."
Then the interviewer calls in the accountant and asks the same question "What do two plus two equal?" The accountant says "On average, four - give or take ten percent, but on average, four."
Then the interviewer calls in the economist and poses the same question "What do two plus two equal?" The economist gets up, locks the door, closes the shade, sits down next to the interviewer and says, "What do you want it to equal"?
[via web_rules, 1/30/09]
Saturday, August 22, 2009
existing-home sales rise
Existing-home sales rose for the fourth-straight month in July, rising 7.2% month-over-month (m/m) to an annual rate of 5.24 million units, higher than the forecast of 5.0 million and an increase of 2.1%, and June figures were unchanged from the 4.89 million unit rate initially reported. Single-family home sales increased 6.5%, while multi-family sales rose 12.5%. Distressed properties continue to weigh down the median existing-home price, which fell 15.1% year-over-year (y/y) in July to $178,400.
The release is impressive in many aspects, posting the first year-over-year increase since November 2005, and the first fourth-straight monthly rise in five years. And despite a 7.3% increase in inventories to 4.09 million existing homes available for sale, the months of supply of homes remained constant at 9.4 months from a month ago. Within single-family homes, the months of supply fell to 8.6 months from 8.9 months in June, while multi-family rose to 15.1 months from 13.1 months in June.
Sales at the low-end of the market have benefited from tax incentives for first-time buyers and are a disproportionate percentage of sales. The low-end doesn't face the obstacles of the higher-end of the market, which include difficult financing and lack of a trade-up market due to the large number of homeowners who are underwater in their mortgages. As unemployment rises, those homeowners who are underwater on their mortgage and lose their jobs become increasingly at risk of entering foreclosure.
As Schwab's Chief Investment Strategist Liz Ann Sonders, and Director of Sector and Market Analysis, Brad Sorensen, CFA, note in their bi-weekly "Schwab Market Perspective: Inside the Recovery Story", while home prices are still declining, they are falling at a slower pace, and combined with high home affordability and government incentives, buyer confidence has improved. Pent-up demand, seasonality and tax incentives have been able to stimulate sales in recent months. However, entering a seasonally weaker period and bumping up against the November 30 expiration of the $8,000 government incentive will test the sustainability of sales increases. To read the rest of the article, go to www.schwab.com/marketinsight.
[Schwab Alerts]
The release is impressive in many aspects, posting the first year-over-year increase since November 2005, and the first fourth-straight monthly rise in five years. And despite a 7.3% increase in inventories to 4.09 million existing homes available for sale, the months of supply of homes remained constant at 9.4 months from a month ago. Within single-family homes, the months of supply fell to 8.6 months from 8.9 months in June, while multi-family rose to 15.1 months from 13.1 months in June.
Sales at the low-end of the market have benefited from tax incentives for first-time buyers and are a disproportionate percentage of sales. The low-end doesn't face the obstacles of the higher-end of the market, which include difficult financing and lack of a trade-up market due to the large number of homeowners who are underwater in their mortgages. As unemployment rises, those homeowners who are underwater on their mortgage and lose their jobs become increasingly at risk of entering foreclosure.
As Schwab's Chief Investment Strategist Liz Ann Sonders, and Director of Sector and Market Analysis, Brad Sorensen, CFA, note in their bi-weekly "Schwab Market Perspective: Inside the Recovery Story", while home prices are still declining, they are falling at a slower pace, and combined with high home affordability and government incentives, buyer confidence has improved. Pent-up demand, seasonality and tax incentives have been able to stimulate sales in recent months. However, entering a seasonally weaker period and bumping up against the November 30 expiration of the $8,000 government incentive will test the sustainability of sales increases. To read the rest of the article, go to www.schwab.com/marketinsight.
[Schwab Alerts]
Wednesday, August 19, 2009
too many bulls?
In the US there’s a weekly poll of stock newsletter writers called the Investors Intelligence survey. This has a great track record as a gauge of investor sentiment. The latest reading shows the lowest level of gloom since the market peaked in October 2007, coupled with the highest level of optimism since January 2008 – just before markets plunged. What’s more, says the FT, another survey of individual investors’ optimism is near its highest point in over a year.
These are classic signals to contrarians like us that prices are about to crack. As David Rosenberg of Glusken Sheff puts it: “it’s highly unlikely that 90% of the economic community can be right on the same thing at the same time”.
These are yet more signs that most investors are gambling on the market rising. And that creates the contrarian’s second sign of a market top.
[via investwise]
And... the Ned Davis Research's NDR Crowd Sentiment Poll recently jumped just into the extreme optimism zone (which is generally bearish for the market).
These are classic signals to contrarians like us that prices are about to crack. As David Rosenberg of Glusken Sheff puts it: “it’s highly unlikely that 90% of the economic community can be right on the same thing at the same time”.
These are yet more signs that most investors are gambling on the market rising. And that creates the contrarian’s second sign of a market top.
[via investwise]
And... the Ned Davis Research's NDR Crowd Sentiment Poll recently jumped just into the extreme optimism zone (which is generally bearish for the market).
Saturday, August 08, 2009
surviving the end of civilization
In his 2008 bestseller, "Wealth, War and Wisdom," hedge fund manager Barton Biggs warns that investors must "assume the possibility of a breakdown of the civilized infrastructure."
And to prepare for a breakdown of civilization, "your safe haven must be self-sufficient and capable of growing some kind of food ... It should be well-stocked with seed, fertilizer, canned food, wine, medicine, clothes, etc." Bloomberg Markets suggested that by "etc." he meant guns, as Biggs added "a few rounds over the approaching brigands' heads would probably be a compelling persuader that there are easier farms to pillage."
That warning's not from a hippie radical. Biggs was a respected Wall Street guru at Morgan Stanley for 30 years. As the chief global strategist Institutional Investor magazine put him on its "All-America Research Team" 10 times. Smart Money said: "Biggs is without question the premier prognosticator on the international scene and a mover of markets from Argentina to Hong Kong."
Behavioral economists have answers. But your gut's also good at predicting. So here's what you'll likely do:
You'll go see the new disaster film, "2012" about the end of the Mayan calendar. After all, it's by the same director who "destroyed" the earth in "The Day After Tomorrow," "Independence Day" and "Godzilla." No new investment strategies, but a must-see film, a great catharsis and distraction.
What will Main Street investors do? Here again, even with the planet's survival threatened, they'll go watch "2012," be entertained, experience a catharsis, feel relieved, and afterwards, have dinner, slip back into denial. And later, they'll vote against anything that offers solutions to future problems, especially if it raises taxes.
Why? Very simple: Our "Brains Aren't Wired to Fear the Future," writes New York Times columnist Nicholas Kristof. We're wired to respond to crises, while pushing off the real big problems (health care, Social Security, etc.)
That's basic behavioral economics: Over tens of thousands of years, evolution has programmed our brains so that collectively we will behave counter-productive with the future, making an "End of Civilization" scenario inevitable, a foregone conclusion, a self-fulfilling prophecy ["Mr. Anderson"]. Why? Because our brains are handicapped, we are literally incapable of acting soon enough to solve the problem.
[via pbo]
And to prepare for a breakdown of civilization, "your safe haven must be self-sufficient and capable of growing some kind of food ... It should be well-stocked with seed, fertilizer, canned food, wine, medicine, clothes, etc." Bloomberg Markets suggested that by "etc." he meant guns, as Biggs added "a few rounds over the approaching brigands' heads would probably be a compelling persuader that there are easier farms to pillage."
That warning's not from a hippie radical. Biggs was a respected Wall Street guru at Morgan Stanley for 30 years. As the chief global strategist Institutional Investor magazine put him on its "All-America Research Team" 10 times. Smart Money said: "Biggs is without question the premier prognosticator on the international scene and a mover of markets from Argentina to Hong Kong."
Behavioral economists have answers. But your gut's also good at predicting. So here's what you'll likely do:
You'll go see the new disaster film, "2012" about the end of the Mayan calendar. After all, it's by the same director who "destroyed" the earth in "The Day After Tomorrow," "Independence Day" and "Godzilla." No new investment strategies, but a must-see film, a great catharsis and distraction.
What will Main Street investors do? Here again, even with the planet's survival threatened, they'll go watch "2012," be entertained, experience a catharsis, feel relieved, and afterwards, have dinner, slip back into denial. And later, they'll vote against anything that offers solutions to future problems, especially if it raises taxes.
Why? Very simple: Our "Brains Aren't Wired to Fear the Future," writes New York Times columnist Nicholas Kristof. We're wired to respond to crises, while pushing off the real big problems (health care, Social Security, etc.)
That's basic behavioral economics: Over tens of thousands of years, evolution has programmed our brains so that collectively we will behave counter-productive with the future, making an "End of Civilization" scenario inevitable, a foregone conclusion, a self-fulfilling prophecy ["Mr. Anderson"]. Why? Because our brains are handicapped, we are literally incapable of acting soon enough to solve the problem.
[via pbo]
unemployment rate dips, stock market goes up
The American economy has shed 6.7 million jobs since the start of the recession, but workers got a bit of good news this morning: the unemployment rate dipped for the first time in more than a year. It now stands at 9.4 percent, down from 9.5 percent. The U.S. Department of Labor reported this morning that employers still cut payrolls in July, but the total job losses were far lower than expected: 247,000.
"The worst may be behind us," President Barack Obama said outside the White House today.
The Dow Jones industrial average climbed 113 points to close at 9,370, closing off another straight up week on Wall Street.
The Standard & Poor's 500, the broadest index of the nation's corporate economy, rose 1.3 percent to close at 1,010, a 10-month high. The Nasdaq rose 1.37 percent today to close at 2,000.
With the pop Friday, the S&P 500 index is up 14.9 percent in only four weeks and 49.4 percent from a 12-year low in early March.
* * *
So I'm guessing if the unemployment rate resumes rising on the next report, expect a market dip.
"The worst may be behind us," President Barack Obama said outside the White House today.
The Dow Jones industrial average climbed 113 points to close at 9,370, closing off another straight up week on Wall Street.
The Standard & Poor's 500, the broadest index of the nation's corporate economy, rose 1.3 percent to close at 1,010, a 10-month high. The Nasdaq rose 1.37 percent today to close at 2,000.
With the pop Friday, the S&P 500 index is up 14.9 percent in only four weeks and 49.4 percent from a 12-year low in early March.
* * *
So I'm guessing if the unemployment rate resumes rising on the next report, expect a market dip.
Thursday, August 06, 2009
The Lottery Effect
One way optimism in security selection is evidences is by the lottery effect. Investors seem driven to investments as having the potential for large gains, such as biotech companies working on cancer cures or mutual funds investing in developing countries. Behavioral researchers have found their decision-makers tend to overweight the strength of information signals (i.e. return potential) and underweight their probability of occurrence (i.e. likelihood of success).
Simply stated, investments perceived as having high return potential tend to be overvalued.
-- Greg Forsyth, OnInvesting, Summer 2007
Simply stated, investments perceived as having high return potential tend to be overvalued.
-- Greg Forsyth, OnInvesting, Summer 2007
Monday, August 03, 2009
federal tax revenues plummetting
WASHINGTON (AP) -- The recession is starving the government of tax revenue, just as the president and Congress are piling a major expansion of health care and other programs on the nation's plate and struggling to find money to pay the tab.
The numbers could hardly be more stark: Tax receipts are on pace to drop 18 percent this year, the biggest single-year decline since the Great Depression, while the federal deficit balloons to a record $1.8 trillion.
Other figures in an Associated Press analysis underscore the recession's impact: Individual income tax receipts are down 22 percent from a year ago. Corporate income taxes are down 57 percent. Social Security tax receipts could drop for only the second time since 1940, and Medicare taxes are on pace to drop for only the third time ever.
The last time the government's revenues were this bleak, the year was 1932 in the midst of the Depression.
The numbers could hardly be more stark: Tax receipts are on pace to drop 18 percent this year, the biggest single-year decline since the Great Depression, while the federal deficit balloons to a record $1.8 trillion.
Other figures in an Associated Press analysis underscore the recession's impact: Individual income tax receipts are down 22 percent from a year ago. Corporate income taxes are down 57 percent. Social Security tax receipts could drop for only the second time since 1940, and Medicare taxes are on pace to drop for only the third time ever.
The last time the government's revenues were this bleak, the year was 1932 in the midst of the Depression.