With core inflation in the U.S. at its lowest level in decades and concern over the economic impact of the credit crisis in Europe, the Federal Reserve may continue the holding pattern that has been in place since December 2008 into next year before raising interest rates.
Whether interest rates begin rising this year or next, many equity investors are already concerned that a shift toward higher rates from such exceptionally low levels might derail a market recovery.
Historically, periods of rising rates have been associated with poor equity performance. But this is not always the case, particularly when rates are just beginning to rise after recessions.
... It is not that unusual, however, for stocks to perform well at least in the early stages of rising rate cycles because “investors are more comforted by improving economic fundamentals and corporate earnings than they are worried about rates at that point,” says Brian Rogers, T. Rowe Price’s chairman and chief
investment officer.
“A rising rate environment tends to be negative for stocks later in the cycle when the Fed tries to slow the pace of economic growth to ease inflationary pressures. That’s probably an issue for 2012 or later.”
Also, the initial rate hikes will comein the wake of the worst financial crisis since the 1930s, so Mr. Rogers adds, “Investors will be relieved because it will signal improving economic conditions globally.”
Indeed, in the nine instances since 1954 when the Federal Reserve first raised the federal funds rate following a recession, the S&P 500 Index recorded an average gain of almost 14% in the subsequent 12 months, rising in all but one of these periods.
-- T. Rowe Price Report, Summer 2010
Monday, August 23, 2010
Friday, August 20, 2010
investing via satellite
As part of a growing trend among hedge funds and Wall Street firms, Cold War-style satellite surveillance is being used to gather market-moving information.
The surveillance pictures are often provided by private- sector companies like DigitalGlobe in Colorado and GeoEye in Virginia, which build and launch satellites and take pictures for US government intelligence agency clients and private-sector satellite analysis firms.
That means there are two links in the chain before the satellite data gets to Wall Street—a satellite firm takes the pictures and sells them to an analysis firm, which scrutinizes the images and sells the aggregated data to hedge funds and Wall Street analysts.
As an example of how Wall Street getting in on this techhology, the UBS Investment Research issued its earnings preview for Wal-Mart's second quarter, which publicly revealed that UBS had been using used satellite services of private-sector satellite companies to gather the comings and goings of the parking lots at Wal-Mart stores. “UBS proprietary satellite parking lot fill rate analysis points to an interesting cadence intra-quarter and potential upside to our view,” the report read.
UBS analyst Neil Currie had been looking at satellite data on Wal-Mart during each month of 2010, and he’d concluded that there was enough correlation between what he was seeing in the satellite pictures of Wal-Mart’s parking lots to the big-box chain’s quarterly earnings, that he was ready to incorporate that data into UBS’ report on Wal-Mart, which releases its earnings on Tuesday.
By counting the cars in Wal-Mart’s parking lots month in and month out, Remote Sensing Metrics analysts were able to get a fix on the company’s customer flow. From there, they worked up a mathematical regression to come up with a prediction of the company’s quarterly revenue each month.
And what the satellite analysts found surprised the UBS team, which was already well versed in the ins and outs of Wal-Mart’s business.
In the second quarter, the satellite analysts had spotted a surge in traffic to Wal-Mart stores during the month of June, which was 4 percent ahead of the same month a year ago. That, they speculated, was driven by an aggressive Wal-Mart price rollback marketing campaign that brought a lot more customers into the stores that month.
Because they could see that traffic showing up in the parking lots, the satellite analysts came up with a much different projection for the company’s quarterly earnings in the second quarter than the UBS team did using traditional methods.
UBS predicts that Wal-Mart’s second quarter sales will be up from the first quarter, but down a percent against the same period a year ago. But the satellite analysts figure that the number will come in 0.7 percent higher—not lower—based on the traffic surge they saw in the parking lots.
[via Value Man @chucks@angels]
The surveillance pictures are often provided by private- sector companies like DigitalGlobe in Colorado and GeoEye in Virginia, which build and launch satellites and take pictures for US government intelligence agency clients and private-sector satellite analysis firms.
That means there are two links in the chain before the satellite data gets to Wall Street—a satellite firm takes the pictures and sells them to an analysis firm, which scrutinizes the images and sells the aggregated data to hedge funds and Wall Street analysts.
As an example of how Wall Street getting in on this techhology, the UBS Investment Research issued its earnings preview for Wal-Mart's second quarter, which publicly revealed that UBS had been using used satellite services of private-sector satellite companies to gather the comings and goings of the parking lots at Wal-Mart stores. “UBS proprietary satellite parking lot fill rate analysis points to an interesting cadence intra-quarter and potential upside to our view,” the report read.
UBS analyst Neil Currie had been looking at satellite data on Wal-Mart during each month of 2010, and he’d concluded that there was enough correlation between what he was seeing in the satellite pictures of Wal-Mart’s parking lots to the big-box chain’s quarterly earnings, that he was ready to incorporate that data into UBS’ report on Wal-Mart, which releases its earnings on Tuesday.
By counting the cars in Wal-Mart’s parking lots month in and month out, Remote Sensing Metrics analysts were able to get a fix on the company’s customer flow. From there, they worked up a mathematical regression to come up with a prediction of the company’s quarterly revenue each month.
And what the satellite analysts found surprised the UBS team, which was already well versed in the ins and outs of Wal-Mart’s business.
In the second quarter, the satellite analysts had spotted a surge in traffic to Wal-Mart stores during the month of June, which was 4 percent ahead of the same month a year ago. That, they speculated, was driven by an aggressive Wal-Mart price rollback marketing campaign that brought a lot more customers into the stores that month.
Because they could see that traffic showing up in the parking lots, the satellite analysts came up with a much different projection for the company’s quarterly earnings in the second quarter than the UBS team did using traditional methods.
UBS predicts that Wal-Mart’s second quarter sales will be up from the first quarter, but down a percent against the same period a year ago. But the satellite analysts figure that the number will come in 0.7 percent higher—not lower—based on the traffic surge they saw in the parking lots.
[via Value Man @chucks@angels]
weath inequality in America
15 Mind-Blowing Facts About Wealth And Inequality In America
The rich are getting richer and the poor are getting poorer. Cliché, sure, but it's also more true than at any time since the Gilded Age.
While politicians gloat about our "recovery," our poor are getting poorer, our average wages are still falling behind inflation, and social mobility is at an all-time low.
But, yes, if you're in that top 1%, life in America is grand.
1. The gap between the top 0.01% and everyone else hasn't been this bad since the Roaring Twenties
2. Half of America owns only 2.5% of country's wealth. The top 1% owns a third of it.
3. Half of America has only 0.5% of America's stocks and bonds. The top 1% owns more than 50%!
And so on..
[via pbo @chucks_angels]
(see also the rich get richer)
*** 8/31/12
Though the correlation isn't perfect, it's clear that -- by these measures -- as disparity between people grows, social health deteriorates.
To prove his point, Wilkinson also introduced a graphic that American residents could better relate to. Using the same measure of income disparity, he plotted how trust deteriorates in individual states when income disparity is high.
[if you think about, it makes sense]
*** 9/12/12
The wealth gap between the richest Americans and the typical family more than doubled over the past 50 years.
In 1962, the top 1% had 125 times the net worth of the median household. That shot up to 288 times by 2010, according to a new report by the left-leaning Economic Policy Institute.
That trend is happening for two reasons: Not only are the rich getting richer, but the middle class is also getting poorer.
Most Americans below the upper echelon have suffered a decline in wealth in recent decades. The median household saw its net worth drop to $57,000 in 2010, down from $73,000 in 1983. It would have been $119,000 had wealth grown equally across households.
The top 1%, on the other hand, saw their average wealth grow to $16.4 million, up from $9.6 million in 1983. This is due in large part to the growing income inequality divide, as well as the sharp rise in value of stocks over the period.
[so much for trickle down]
The rich are getting richer and the poor are getting poorer. Cliché, sure, but it's also more true than at any time since the Gilded Age.
While politicians gloat about our "recovery," our poor are getting poorer, our average wages are still falling behind inflation, and social mobility is at an all-time low.
But, yes, if you're in that top 1%, life in America is grand.
1. The gap between the top 0.01% and everyone else hasn't been this bad since the Roaring Twenties
2. Half of America owns only 2.5% of country's wealth. The top 1% owns a third of it.
3. Half of America has only 0.5% of America's stocks and bonds. The top 1% owns more than 50%!
And so on..
[via pbo @chucks_angels]
(see also the rich get richer)
*** 8/31/12
Though the correlation isn't perfect, it's clear that -- by these measures -- as disparity between people grows, social health deteriorates.
To prove his point, Wilkinson also introduced a graphic that American residents could better relate to. Using the same measure of income disparity, he plotted how trust deteriorates in individual states when income disparity is high.
[if you think about, it makes sense]
*** 9/12/12
The wealth gap between the richest Americans and the typical family more than doubled over the past 50 years.
In 1962, the top 1% had 125 times the net worth of the median household. That shot up to 288 times by 2010, according to a new report by the left-leaning Economic Policy Institute.
That trend is happening for two reasons: Not only are the rich getting richer, but the middle class is also getting poorer.
Most Americans below the upper echelon have suffered a decline in wealth in recent decades. The median household saw its net worth drop to $57,000 in 2010, down from $73,000 in 1983. It would have been $119,000 had wealth grown equally across households.
The top 1%, on the other hand, saw their average wealth grow to $16.4 million, up from $9.6 million in 1983. This is due in large part to the growing income inequality divide, as well as the sharp rise in value of stocks over the period.
[so much for trickle down]
Thursday, August 19, 2010
I don't trust marketocracy
I was sitting on a big gain on AIPC as it got bought out by Ralcorp. I had 3000 shares which I hadn't sold yet, priced at 54 which was the buying price of Ralcorp.
Suddenly on July 23, the AIPC shares disappeared. But no sign of the money! I figure marketocracy owes me $162,000!
(Good thing this isn't real money :)
Stay tuned to see if the money ever shows up.
Suddenly on July 23, the AIPC shares disappeared. But no sign of the money! I figure marketocracy owes me $162,000!
(Good thing this isn't real money :)
Stay tuned to see if the money ever shows up.
Monday, August 09, 2010
The Fiscal Illusion Effect
As the debate rages over letting some of the Bush tax cuts expire, Republicans have raised their starve-the-beast theory from its coffin. They insist that government (the "beast") can be shrunk by cutting taxes: The less money government has, the less government there can be.
Time has not been kind to this theory. The beast never did better than when tax-cutting Republicans were in charge.
The fiscal grown-ups who used to run the Republican Party didn't cotton to reducing taxes before spending in normal times. But Ronald Reagan offered the far more pleasurable doctrine of just cutting taxes.
"Well, if you've got a kid that's extravagant, you can lecture him all you want to about his extravagance," Reagan said in his 1980 campaign. "Or you can cut his allowance and achieve the same end much quicker."
No one turned the starving-beast theory into baloney faster than Reagan, who followed his tax cuts with a spending binge fueled by massive borrowing. What he did, in effect, was cut the extravagant kid's allowance and then hand him 10 credit cards.
The national debt doubled under Reagan. It doubled again under George W. Bush, who followed the same reckless path. (At least Reagan subsequently raised taxes in the face of soaring deficits.)
Frustrated fiscal conservatives - a group that includes Democrats, Republicans and, above all, independents - are assessing another tool for imposing budgetary discipline: the "Fiscal Illusion" effect. Totally contrary to starve-the-beast, it promotes raising taxes as the better way to contain government.
Time has not been kind to this theory. The beast never did better than when tax-cutting Republicans were in charge.
The fiscal grown-ups who used to run the Republican Party didn't cotton to reducing taxes before spending in normal times. But Ronald Reagan offered the far more pleasurable doctrine of just cutting taxes.
"Well, if you've got a kid that's extravagant, you can lecture him all you want to about his extravagance," Reagan said in his 1980 campaign. "Or you can cut his allowance and achieve the same end much quicker."
No one turned the starving-beast theory into baloney faster than Reagan, who followed his tax cuts with a spending binge fueled by massive borrowing. What he did, in effect, was cut the extravagant kid's allowance and then hand him 10 credit cards.
The national debt doubled under Reagan. It doubled again under George W. Bush, who followed the same reckless path. (At least Reagan subsequently raised taxes in the face of soaring deficits.)
Frustrated fiscal conservatives - a group that includes Democrats, Republicans and, above all, independents - are assessing another tool for imposing budgetary discipline: the "Fiscal Illusion" effect. Totally contrary to starve-the-beast, it promotes raising taxes as the better way to contain government.
Friday, August 06, 2010
$1.47 trillion
New estimates from the White House on Friday predict the budget deficit will reach a record $1.47 trillion this year. The government is borrowing 41 cents of every dollar it spends.
That's actually a little better than the administration predicted in February.
The new estimates paint a grim unemployment picture as the economy experiences a relatively jobless recovery. The unemployment rate, presently averaging 9.5 percent, would average 9 percent next year under the new estimates.
The Office of Management and Budget report has ominous news for President Barack Obama should he seek re-election in 2012 — a still-high unemployment rate of 8.1 percent. That would be well above normal, which is closer to a rate of 5.5 percent to 6 percent. Private economists don't think the unemployment rate will drop to those levels until well into this decade.
That's actually a little better than the administration predicted in February.
The new estimates paint a grim unemployment picture as the economy experiences a relatively jobless recovery. The unemployment rate, presently averaging 9.5 percent, would average 9 percent next year under the new estimates.
The Office of Management and Budget report has ominous news for President Barack Obama should he seek re-election in 2012 — a still-high unemployment rate of 8.1 percent. That would be well above normal, which is closer to a rate of 5.5 percent to 6 percent. Private economists don't think the unemployment rate will drop to those levels until well into this decade.
Thursday, August 05, 2010
The Giving Pledge
MORE than three dozen billionaires, including well-known philanthropists such as David Rockefeller and New York City mayor Michael Bloomberg and less familiar big donors such as Lorry Lokey, founder of Business Wire, have promised at least half of their fortunes to charity, joining a program that Bill and Melinda Gates and Warren Buffett started in June to encourage other wealthy people to give.
The pledge has been a matter of debate in philanthropic circles, with experts dismissing it as a publicity stunt and others predicting that it would produce a flood of new money to support non-profit groups.
The program has predicted that it will draw $600 billion into philanthropy - or about twice the estimated total amount given by Americans last year - although Buffett acknowledged that some of the money would have been donated anyway: ''It's not like all or half of the money represented is added money - but some of it is added.''
He said he thought the real value of the pledge was found in the example that it set and in the sentiments expressed in the letters posted on the website.
Perhaps the biggest surprise on the list was Larry Ellison, the founder of Oracle, who became the bad boy of philanthropy after he withdrew a $115 million gift from Harvard in protest over the resignation of Lawrence H. Summers as president.
In a brief note addressed ''To Whom It May Concern'', Ellison disclosed that he had assigned 95 per cent of his wealth to a trust and noted that he had given hundreds of millions of dollars away for medical research and education. ''Until now, I have done this giving quietly - because I have long believed that charitable giving is a personal and private matter,'' Ellison wrote. ''So why am I going public now? Warren Buffett personally asked me to write this letter because he said I would be 'setting an example' and 'influencing others' to give. I hope he's right.''
Buffett said the number of people who had agreed to sign on was at the high end of his expectations. He said some people who did not agree to sign the pledge were planning to give away most of their wealth but did not want to draw attention to those plans.
Some went on ''a tirade'' about the government and rising taxes, Buffett said - declining, of course, to name them.
''A few got into that, and there are some that have a dynastic attitude toward wealth,'' he said.
''That tends to be the case where they themselves inherited this money and maybe feel some sort of intergenerational compact about it.''
The rich list
Paul Allen; Laura and John Arnold, Michael Bloomberg, Eli and Edythe Broad, Warren Buffett, Michele Chan and Patrick Soon-Shiong, Barry Diller and Diane von Furstenberg, Ann and John Doerr, Larry Ellison, Bill and Melinda Gates, Barron Hilton, Jon and Karen Huntsman, Joan and Irwin Jacobs, George Kaiser, Elaine and Ken Langone, Gerry and Marguerite Lenfest, Lorry Lokey, George Lucas, Alfred Mann, Bernie and Billi Marcus, Thomas Monaghan, Tashia and John Morgridge, Pierre and Pam Omidyar, Bernard and Barbro Osher, Ronald Perelman, Peter Peterson, T. Boone Pickens, Julian Robertson jnr, David Rockefeller, David Rubenstein, Herb and Marion Sandler, Vicki and Roger Sant, Walter Scott, Jim and Marilyn Simons, Jeff Skoll, Tom Steyer and Kat Taylor, Jim and Virginia Stowers, Ted Turner, Sanford and Joan Weill and Shelby White.
NEW YORK TIMES
***
Right-wingers respond.
The pledge has been a matter of debate in philanthropic circles, with experts dismissing it as a publicity stunt and others predicting that it would produce a flood of new money to support non-profit groups.
The program has predicted that it will draw $600 billion into philanthropy - or about twice the estimated total amount given by Americans last year - although Buffett acknowledged that some of the money would have been donated anyway: ''It's not like all or half of the money represented is added money - but some of it is added.''
He said he thought the real value of the pledge was found in the example that it set and in the sentiments expressed in the letters posted on the website.
Perhaps the biggest surprise on the list was Larry Ellison, the founder of Oracle, who became the bad boy of philanthropy after he withdrew a $115 million gift from Harvard in protest over the resignation of Lawrence H. Summers as president.
In a brief note addressed ''To Whom It May Concern'', Ellison disclosed that he had assigned 95 per cent of his wealth to a trust and noted that he had given hundreds of millions of dollars away for medical research and education. ''Until now, I have done this giving quietly - because I have long believed that charitable giving is a personal and private matter,'' Ellison wrote. ''So why am I going public now? Warren Buffett personally asked me to write this letter because he said I would be 'setting an example' and 'influencing others' to give. I hope he's right.''
Buffett said the number of people who had agreed to sign on was at the high end of his expectations. He said some people who did not agree to sign the pledge were planning to give away most of their wealth but did not want to draw attention to those plans.
Some went on ''a tirade'' about the government and rising taxes, Buffett said - declining, of course, to name them.
''A few got into that, and there are some that have a dynastic attitude toward wealth,'' he said.
''That tends to be the case where they themselves inherited this money and maybe feel some sort of intergenerational compact about it.''
The rich list
Paul Allen; Laura and John Arnold, Michael Bloomberg, Eli and Edythe Broad, Warren Buffett, Michele Chan and Patrick Soon-Shiong, Barry Diller and Diane von Furstenberg, Ann and John Doerr, Larry Ellison, Bill and Melinda Gates, Barron Hilton, Jon and Karen Huntsman, Joan and Irwin Jacobs, George Kaiser, Elaine and Ken Langone, Gerry and Marguerite Lenfest, Lorry Lokey, George Lucas, Alfred Mann, Bernie and Billi Marcus, Thomas Monaghan, Tashia and John Morgridge, Pierre and Pam Omidyar, Bernard and Barbro Osher, Ronald Perelman, Peter Peterson, T. Boone Pickens, Julian Robertson jnr, David Rockefeller, David Rubenstein, Herb and Marion Sandler, Vicki and Roger Sant, Walter Scott, Jim and Marilyn Simons, Jeff Skoll, Tom Steyer and Kat Taylor, Jim and Virginia Stowers, Ted Turner, Sanford and Joan Weill and Shelby White.
NEW YORK TIMES
***
Right-wingers respond.
How Peter Lynch destroyed the market
Peter Lynch didn't just beat the Street ... he absolutely destroyed it.
Reflect on his record for a second. Lynch ran Fidelity's Magellan Fund from 1977 to 1990, beating the S&P 500 in all but two of those years. He averaged annual returns of 29%. That's a mind-blowing figure. It means that $1 grew to more than $27; if you invested as little as $37,000 with him in 1977, you were a millionaire in 1990.
Fortunately for us, he's willing to share his secrets. To achieve his stunning track record, he clung to eight simple principles.
[via How Warren Buffett destroyed the market via How Warren Buffett destroyed the market via WBIFC]
Reflect on his record for a second. Lynch ran Fidelity's Magellan Fund from 1977 to 1990, beating the S&P 500 in all but two of those years. He averaged annual returns of 29%. That's a mind-blowing figure. It means that $1 grew to more than $27; if you invested as little as $37,000 with him in 1977, you were a millionaire in 1990.
Fortunately for us, he's willing to share his secrets. To achieve his stunning track record, he clung to eight simple principles.
[via How Warren Buffett destroyed the market via How Warren Buffett destroyed the market via WBIFC]
Tuesday, August 03, 2010
Dow 14000 in 2011?
The Cabot Market Letter says that "from the market's low point in the year of the midterm elections (like 2010) to its high the following year (2011), the major averages have averaged a gain of nearly 50%."
The letter concludes that "with a Dow low of 9,687, a rally into 2011 could carry the index well above 13,000 and even to 14,000. It might sound crazy, but history suggests it's not just possible but likely!"
The letter concludes that "with a Dow low of 9,687, a rally into 2011 could carry the index well above 13,000 and even to 14,000. It might sound crazy, but history suggests it's not just possible but likely!"
Wednesday, July 28, 2010
cheapest in three decades?
Stocks are trading near their cheapest levels in almost three decades. It's a buying opportunity if you're brave enough to face the risks that have scared off investors lately.
S&P 500 stocks are trading at a price-to-earnings ratio of about 13 times their expected earnings for the next 12 months, according to the research firm Birinyi Associates. Going back to 1990, the average has been around 19; the lower the P/E ratio, the cheaper the stock is considered.
Except for the market meltdown from late 2008 to early 2009, stocks haven't traded at such a cheap level since 1982, when the price was about eight times expected earnings.
***
[8/2/10] Or is the market overvalued?
***
[8/13/10] gurufocus says market is fairly valued (as of this writing)
S&P 500 stocks are trading at a price-to-earnings ratio of about 13 times their expected earnings for the next 12 months, according to the research firm Birinyi Associates. Going back to 1990, the average has been around 19; the lower the P/E ratio, the cheaper the stock is considered.
Except for the market meltdown from late 2008 to early 2009, stocks haven't traded at such a cheap level since 1982, when the price was about eight times expected earnings.
***
[8/2/10] Or is the market overvalued?
***
[8/13/10] gurufocus says market is fairly valued (as of this writing)
Sunday, July 18, 2010
voodoo economics
Now there are many things one could call the Bush economy, an economy that, even before recession struck, was characterized by sluggish job growth and stagnant family incomes; “vibrant” isn’t one of them. But the real news here is the confirmation that Republicans remain committed to deep voodoo, the claim that cutting taxes actually increases revenues.
It’s not true, of course. Ronald Reagan said that his tax cuts would reduce deficits, then presided over a near-tripling of federal debt. When Bill Clinton raised taxes on top incomes, conservatives predicted economic disaster; what actually followed was an economic boom and a remarkable swing from budget deficit to surplus. Then the Bush tax cuts came along, helping turn that surplus into a persistent deficit, even before the crash.
But we’re talking about voodoo economics here, so perhaps it’s not surprising that belief in the magical powers of tax cuts is a zombie doctrine: no matter how many times you kill it with facts, it just keeps coming back. And despite repeated failure in practice, it is, more than ever, the official view of the G.O.P.
***
Where did the term voodoo economics come from? It was George Bush (Sr.) describing Reaganomics.
Before Reagan's election, Reaganomics was considered extreme by the moderate wing of the Republican Party. While running against Reagan for the Presidential nomination in 1980, George Bush had derided Reaganomics as "voodoo economics".[35] Similarly, in 1976, Gerald Ford had severely criticized Reagan's proposal to turn back a large part of the Federal budget to the states. Since Reagan's presidency, however, Republican federal politicians have for the most part continued to support his program of low taxes and private sector growth.
***
[8/11/10 looking up the Laffer curve as mentioned by buddy in response to my response to his tax hike chain mail]
If there's one thing that Republican politicians agree on, it's that slashing taxes brings the government more money. "You cut taxes, and the tax revenues increase," President Bush said in a speech last year. Keeping taxes low, Vice President Dick Cheney explained in a recent interview, "does produce more revenue for the Federal Government." Presidential candidate John McCain declared in March that "tax cuts ... as we all know, increase revenues." His rival Rudy Giuliani couldn't agree more. "I know that reducing taxes produces more revenues," he intones in a new TV ad.
If there's one thing that economists agree on, it's that these claims are false. We're not talking just ivory-tower lefties. Virtually every economics Ph.D. who has worked in a prominent role in the Bush Administration acknowledges that the tax cuts enacted during the past six years have not paid for themselves--and were never intended to. Harvard professor Greg Mankiw, chairman of Bush's Council of Economic Advisers from 2003 to 2005, even devotes a section of his best-selling economics textbook to debunking the claim that tax cuts increase revenues.
The yawning chasm between Republican rhetoric on taxes and even informed conservative opinion is maddening to those of wonkish bent. Pointing it out has become an opinion-column staple. But none of these screeds seem to have altered the political debate. So rather than write yet another, I decided to find out what Arthur Laffer thought.
Laffer is a bona fide economist with a doctorate from Stanford. He's also largely responsible for the Republican belief that tax cuts pay for themselves. Now 67, Laffer runs economic-consulting and money-management firms in Nashville. About the best I could get out of him on the question of whether the Bush tax cuts have paid for themselves was "I don't know."
It’s not true, of course. Ronald Reagan said that his tax cuts would reduce deficits, then presided over a near-tripling of federal debt. When Bill Clinton raised taxes on top incomes, conservatives predicted economic disaster; what actually followed was an economic boom and a remarkable swing from budget deficit to surplus. Then the Bush tax cuts came along, helping turn that surplus into a persistent deficit, even before the crash.
But we’re talking about voodoo economics here, so perhaps it’s not surprising that belief in the magical powers of tax cuts is a zombie doctrine: no matter how many times you kill it with facts, it just keeps coming back. And despite repeated failure in practice, it is, more than ever, the official view of the G.O.P.
***
Where did the term voodoo economics come from? It was George Bush (Sr.) describing Reaganomics.
Before Reagan's election, Reaganomics was considered extreme by the moderate wing of the Republican Party. While running against Reagan for the Presidential nomination in 1980, George Bush had derided Reaganomics as "voodoo economics".[35] Similarly, in 1976, Gerald Ford had severely criticized Reagan's proposal to turn back a large part of the Federal budget to the states. Since Reagan's presidency, however, Republican federal politicians have for the most part continued to support his program of low taxes and private sector growth.
***
[8/11/10 looking up the Laffer curve as mentioned by buddy in response to my response to his tax hike chain mail]
If there's one thing that Republican politicians agree on, it's that slashing taxes brings the government more money. "You cut taxes, and the tax revenues increase," President Bush said in a speech last year. Keeping taxes low, Vice President Dick Cheney explained in a recent interview, "does produce more revenue for the Federal Government." Presidential candidate John McCain declared in March that "tax cuts ... as we all know, increase revenues." His rival Rudy Giuliani couldn't agree more. "I know that reducing taxes produces more revenues," he intones in a new TV ad.
If there's one thing that economists agree on, it's that these claims are false. We're not talking just ivory-tower lefties. Virtually every economics Ph.D. who has worked in a prominent role in the Bush Administration acknowledges that the tax cuts enacted during the past six years have not paid for themselves--and were never intended to. Harvard professor Greg Mankiw, chairman of Bush's Council of Economic Advisers from 2003 to 2005, even devotes a section of his best-selling economics textbook to debunking the claim that tax cuts increase revenues.
The yawning chasm between Republican rhetoric on taxes and even informed conservative opinion is maddening to those of wonkish bent. Pointing it out has become an opinion-column staple. But none of these screeds seem to have altered the political debate. So rather than write yet another, I decided to find out what Arthur Laffer thought.
Laffer is a bona fide economist with a doctorate from Stanford. He's also largely responsible for the Republican belief that tax cuts pay for themselves. Now 67, Laffer runs economic-consulting and money-management firms in Nashville. About the best I could get out of him on the question of whether the Bush tax cuts have paid for themselves was "I don't know."
Thursday, July 15, 2010
Senate passes financial overhaul bill
The Senate passed the financial overhaul package in a final vote Thursday, ending more than a year of wrangling over the shape of the landmark legislation. The focus now shifts to the monumental task of implementing the new regulations over coming weeks and months.
The 60 to 39 decision came just before 3 p.m, only a few hours after Democrats cleared a final procedural hurdle by securing enough votes to break a GOP filibuster. The bill now goes to the White House for President Obama's signature.
Three Republicans -- Scott Brown of Massachusetts and Olympia Snowe and Susan Collins of Maine -- joined 57 members of the Democratic caucus in supporting the bill. Sen. Russell Feingold of Wisconsin was the lone Democrat to oppose the measure, saying it failed to go far enough in reining in the financial recklessness and regulatory failures that led to the recent financial crisis.
The House passed the bill late last month, shortly after a House-Senate conference committee had merged earlier versions of the bill into a final, 2,300-page product.
Obama probably will sign the legislation into law next week, aides said, solidifying his second major legislative victory of the year behind the revamp of health care.
The 60 to 39 decision came just before 3 p.m, only a few hours after Democrats cleared a final procedural hurdle by securing enough votes to break a GOP filibuster. The bill now goes to the White House for President Obama's signature.
Three Republicans -- Scott Brown of Massachusetts and Olympia Snowe and Susan Collins of Maine -- joined 57 members of the Democratic caucus in supporting the bill. Sen. Russell Feingold of Wisconsin was the lone Democrat to oppose the measure, saying it failed to go far enough in reining in the financial recklessness and regulatory failures that led to the recent financial crisis.
The House passed the bill late last month, shortly after a House-Senate conference committee had merged earlier versions of the bill into a final, 2,300-page product.
Obama probably will sign the legislation into law next week, aides said, solidifying his second major legislative victory of the year behind the revamp of health care.
Saturday, July 10, 2010
large cap stocks look cheap
Based on Morningstar indexes, over the past 10 years, large-cap stocks have lost 2.7% per year while small caps have gained 4.8% per year. This outperformance of small caps has caused them to look more expensive relative to large caps. On a price/earnings basis, small caps currently trade at about 15.6 times earnings while large caps trade at about 14.1 times earnings. Thus, small caps trade at about an 11% premium to large caps. This is wide by historical standards, as over the past 10 years, small caps have traded at a slight discount to large caps on average.
In the midst of the tech bubble, large caps traded at a P/E of 31 times while small caps traded at 16 times. Part of the reason that small caps currently trade at a premium is that analysts expect them to have better earnings growth over the next three to five years. However, we feel that GDP growth is likely to disappoint, which will impact stocks with higher growth expectations more severely than stocks with more muted expectations.
In the midst of the tech bubble, large caps traded at a P/E of 31 times while small caps traded at 16 times. Part of the reason that small caps currently trade at a premium is that analysts expect them to have better earnings growth over the next three to five years. However, we feel that GDP growth is likely to disappoint, which will impact stocks with higher growth expectations more severely than stocks with more muted expectations.
Wednesday, July 07, 2010
Doug Kass calls the bottom for the year
New York City is in the midst of a serious heat wave, but on Wall Street the stock market is on a major cold streak. Stocks are down 9 of the past 11 sessions. Even Tuesday's higher close was still well off the highs of the day.
Doug Kass of Seabreeze Partners, famous for calling the market bottom in March 2009, isn't worried. In fact, he's bullish. "I think we've seen the lows of the year," he tells Tech Ticker guest host Jon Najarian of OptionMonster.com. "The market's are traveling on a path of fear and share prices have significantly disconnected from fundamentals," he says.
Kass predicts stocks will rise 10%-12% by year's end on the back of strong earnings and a better-than-expected economic recovery. He says positive trends in the ISM manufacturing and non-manufacturing index and improved labor market conditions point to "moderate domestic economic expansion, not a double dip."
Trading at around 11 times earnings, stocks are fairly inexpensive, says Kass. He notes stocks generally trade at around 15 times future earnings, and even higher in periods of tame inflation and low interest rates, as we're currently experiencing.
It may not be a V-shaped rally like that of 2009, but Kass says we've just started building a base, which could lead to a fundamentally stronger and longer-lasting rally in the future.
[via bdparts]
Doug Kass of Seabreeze Partners, famous for calling the market bottom in March 2009, isn't worried. In fact, he's bullish. "I think we've seen the lows of the year," he tells Tech Ticker guest host Jon Najarian of OptionMonster.com. "The market's are traveling on a path of fear and share prices have significantly disconnected from fundamentals," he says.
Kass predicts stocks will rise 10%-12% by year's end on the back of strong earnings and a better-than-expected economic recovery. He says positive trends in the ISM manufacturing and non-manufacturing index and improved labor market conditions point to "moderate domestic economic expansion, not a double dip."
Trading at around 11 times earnings, stocks are fairly inexpensive, says Kass. He notes stocks generally trade at around 15 times future earnings, and even higher in periods of tame inflation and low interest rates, as we're currently experiencing.
It may not be a V-shaped rally like that of 2009, but Kass says we've just started building a base, which could lead to a fundamentally stronger and longer-lasting rally in the future.
[via bdparts]
Tuesday, June 29, 2010
Krugman is depressing
For the last several months, Princeton professor Paul Krugman has become increasingly agitated about what he feels is a disastrous mistake in the making -- a sudden global obsession with "austerity" that will lead to spending cuts in many nations in Europe and, possibly, the United States.
Krugman believes that this is exactly the same mistake we made in 1937, when the country was beginning to emerge from the Great Depression. A sudden focus on austerity in 1937, it is widely believed, halted four years of strong growth and plunged the country back into recession, sending the unemployment rate soaring again.
In Krugman's view, the world should keep spending now, to offset the pain of the recession and high unemployment--and then start cutting back as soon as the economy is robustly healthy again.
Those concerned about the world's massive debt and deficits, however, have seized control of the public debate, and are scaring the world's governments into cutting back.
Which fate is worse? It depends on your time frame.
Cutting back on spending now would almost certainly make the economy worse, at least for the short run. Not cutting back on spending later, meanwhile (and Congress has shown no ability to curtail spending), will almost certainly keep us on a road to hell in a handbasket.
The White House's own budget projections show the deficit improving as a percent of GDP to about -4% by 2013. After that, however, even the White House doesn't think things will get much better. After a few years of bumping along at about -4%, the deficit will begin to soar at the end of the decade. And thanks to the ballooning costs of Medicare, Medicaid, and Social Security--along with inflating interest payments from all the debt we're accumulating--the White House expects the deficit to soar to a staggering -62% of GDP by 2085.
What Krugman and his foes agree on is that that's no way to run a country. And it's time we finally faced up to that.
In the meantime, we'll continue to fight about what to do in the near-term. And Krugman thinks he has lost that war and we're headed for another Depression.
***
Many prominent investors, and economists are now warning that our economy is in big trouble. On the left many are arguing for more stimulus spending, while on the right many are arguing for cutting spending. The one theme these "doomsayers" have in common is that they all are painting a not so pretty picture of the US economy.
On the left, Nobel Laureate Paul Krugman recently penned a frightening op-ed in the New York Times. Krugman, warned that the United States has entered the initial stages of a third Depression. In his view, inadequate fiscal and monetary stimulus, coupled with obsessive worry about short-term, record breaking budget deficits, are increasing the probability of a long, deflationary-driven Depression.
On the right, economists, and politicans are calling for the Government to cut spending, which they predict will lead to the collapse of the dollar at current rates. Ron Paul, and Peter Schiff have called for painful spending cuts, higher interest rates, and end to bailouts.
Krugman believes that this is exactly the same mistake we made in 1937, when the country was beginning to emerge from the Great Depression. A sudden focus on austerity in 1937, it is widely believed, halted four years of strong growth and plunged the country back into recession, sending the unemployment rate soaring again.
In Krugman's view, the world should keep spending now, to offset the pain of the recession and high unemployment--and then start cutting back as soon as the economy is robustly healthy again.
Those concerned about the world's massive debt and deficits, however, have seized control of the public debate, and are scaring the world's governments into cutting back.
Which fate is worse? It depends on your time frame.
Cutting back on spending now would almost certainly make the economy worse, at least for the short run. Not cutting back on spending later, meanwhile (and Congress has shown no ability to curtail spending), will almost certainly keep us on a road to hell in a handbasket.
The White House's own budget projections show the deficit improving as a percent of GDP to about -4% by 2013. After that, however, even the White House doesn't think things will get much better. After a few years of bumping along at about -4%, the deficit will begin to soar at the end of the decade. And thanks to the ballooning costs of Medicare, Medicaid, and Social Security--along with inflating interest payments from all the debt we're accumulating--the White House expects the deficit to soar to a staggering -62% of GDP by 2085.
What Krugman and his foes agree on is that that's no way to run a country. And it's time we finally faced up to that.
In the meantime, we'll continue to fight about what to do in the near-term. And Krugman thinks he has lost that war and we're headed for another Depression.
***
Many prominent investors, and economists are now warning that our economy is in big trouble. On the left many are arguing for more stimulus spending, while on the right many are arguing for cutting spending. The one theme these "doomsayers" have in common is that they all are painting a not so pretty picture of the US economy.
On the left, Nobel Laureate Paul Krugman recently penned a frightening op-ed in the New York Times. Krugman, warned that the United States has entered the initial stages of a third Depression. In his view, inadequate fiscal and monetary stimulus, coupled with obsessive worry about short-term, record breaking budget deficits, are increasing the probability of a long, deflationary-driven Depression.
On the right, economists, and politicans are calling for the Government to cut spending, which they predict will lead to the collapse of the dollar at current rates. Ron Paul, and Peter Schiff have called for painful spending cuts, higher interest rates, and end to bailouts.
Sunday, June 27, 2010
Li Lu on BYD
What I think we are doing today with our investment in BYD in China is really helping China march towards a modern era of prosperity. BYD is providing a solution to both China and the US, to migrate from the past to a way that gets us out of the unsustainable carbon age that we live in. Global warming is a vital concern to every human being, so China is providing a great contribution to everybody with BYD. America has had a great history of invention and here is a great company in China that is about to make a major contribution to human civilization with cheap electric vehicles and solar power.
Ultimately we will have to get our energy from the sun. Most of the energy, even fossil fuels (plants that die and then go into the ground), all originally come from the sun. So if you can figure out a way to take energy from the sun and power vehicles, while using batteries to store it, inexpensively — will really make renewable energy power everything. The combination of those things holds the key to the future of industrial civilization that we are about to embark on. We didn’t set out with BYD with this in mind, it just happened that way. With great companies, it only looks logical in retrospect. Think about how Bill Gates started Microsoft. I don’t think he knew up front that he would take the entire market — at that time it did not exist. It is the same way with our investment in BYD. Ultimately, I think finding an inexpensive way to store energy that we harness from the sun will be a huge contribution for both China and the US, but more broadly our entire civilization.
[via lethean46]
Ultimately we will have to get our energy from the sun. Most of the energy, even fossil fuels (plants that die and then go into the ground), all originally come from the sun. So if you can figure out a way to take energy from the sun and power vehicles, while using batteries to store it, inexpensively — will really make renewable energy power everything. The combination of those things holds the key to the future of industrial civilization that we are about to embark on. We didn’t set out with BYD with this in mind, it just happened that way. With great companies, it only looks logical in retrospect. Think about how Bill Gates started Microsoft. I don’t think he knew up front that he would take the entire market — at that time it did not exist. It is the same way with our investment in BYD. Ultimately, I think finding an inexpensive way to store energy that we harness from the sun will be a huge contribution for both China and the US, but more broadly our entire civilization.
[via lethean46]
Wednesday, June 16, 2010
The 200-day moving average
The market dispatch people (Elizabeth Strott and Charlie Blaine, not to mention Reitmeister below) keep mentioning the 200-day moving average as a key technical indicator. So what's up with that? Here's a Mark Hulbert article about it.
***
ANNANDALE, Va. (MarketWatch) -- It was Voltaire who famously said that the perfect is the enemy of the good. And, though he wasn't talking about investing, he very well could have been: The relentless pursuit of a "perfect" market timing system can lead to an inferior result.
Take market timers who rely on the 200-day moving average to determine whether they should be in or out of the stock market. It is by no means a perfect system, as I'll discuss in a moment. But, by the same token, it has proven difficult -- in practice -- to do better.
Though trend-following systems have a long history, I suspect that the popularity of the 200-day moving average in recent decades can be traced largely to Richard Fabian, who during the 1970s began championing a 39-week moving average (virtually the same as a 200-day moving average). At the time, Fabian was editor of the Telephone Switch Letter, an advisory service that has since gone through several metamorphoses and is now edited by his son, Douglas Fabian, and called Doug Fabian's Successful Investing.
Fabian the Elder told subscribers that they need not spend more than a minute a week determining whether they should be in stock mutual funds or cash. If the market was above its average level of the previous 39 weeks, then they should be in the market -- and otherwise in cash.
Compared to almost all other market timing systems I monitor, this one was the simplest. And yet, it also turned out to perform quite well: For the decade of the 1980s, for example, it was the very best performer of any tracked by the Hulbert Financial Digest.
Still, the approach was (and is) not perfect, and Fabian was one of the first to say so. He often said, for example, that a 52-week moving average system would produce superior long-term returns than the 39-week system. He nevertheless stuck with the 39-week average because he believed that investors would not be willing to sit out the intermediate-term declines that a longer-term moving average would require.
Researchers in recent years have raised even more serious theoretical questions about this market timing system. One was that its market-beating potential appeared by the late 1990s to have become greatly diminished, leading some to speculate that the veritable golden-egg-laying goose had been killed by too many investors trying to follow the 200-day moving average. (Read my 2004 column mentioning some of this research.)
Another chink in the 200-day moving average's armor is the argument, advanced by Ned Davis of Ned Davis Research, that the approach works primarily during secular (long-term) bull markets. One of the hallmarks of cyclical (shorter-term) bull markets, according to Davis, is that during them, trend-following systems tend not to work. (Read my Sept. 1, 2009 column on Davis' argument.)
Given these apparent defects, you might think that doing better than the 200-day moving average would have been relatively easy, especially in recent years. But it hasn't been.
We know because Fabian the Younger has been trying to improve on it, almost from the point he took over the advisory service from his father in the early 1990s. On balance, his deviations from the mechanical 39-week moving average system have cost his model portfolio.
***
ANNANDALE, Va. (MarketWatch) -- It was Voltaire who famously said that the perfect is the enemy of the good. And, though he wasn't talking about investing, he very well could have been: The relentless pursuit of a "perfect" market timing system can lead to an inferior result.
Take market timers who rely on the 200-day moving average to determine whether they should be in or out of the stock market. It is by no means a perfect system, as I'll discuss in a moment. But, by the same token, it has proven difficult -- in practice -- to do better.
Though trend-following systems have a long history, I suspect that the popularity of the 200-day moving average in recent decades can be traced largely to Richard Fabian, who during the 1970s began championing a 39-week moving average (virtually the same as a 200-day moving average). At the time, Fabian was editor of the Telephone Switch Letter, an advisory service that has since gone through several metamorphoses and is now edited by his son, Douglas Fabian, and called Doug Fabian's Successful Investing.
Fabian the Elder told subscribers that they need not spend more than a minute a week determining whether they should be in stock mutual funds or cash. If the market was above its average level of the previous 39 weeks, then they should be in the market -- and otherwise in cash.
Compared to almost all other market timing systems I monitor, this one was the simplest. And yet, it also turned out to perform quite well: For the decade of the 1980s, for example, it was the very best performer of any tracked by the Hulbert Financial Digest.
Still, the approach was (and is) not perfect, and Fabian was one of the first to say so. He often said, for example, that a 52-week moving average system would produce superior long-term returns than the 39-week system. He nevertheless stuck with the 39-week average because he believed that investors would not be willing to sit out the intermediate-term declines that a longer-term moving average would require.
Researchers in recent years have raised even more serious theoretical questions about this market timing system. One was that its market-beating potential appeared by the late 1990s to have become greatly diminished, leading some to speculate that the veritable golden-egg-laying goose had been killed by too many investors trying to follow the 200-day moving average. (Read my 2004 column mentioning some of this research.)
Another chink in the 200-day moving average's armor is the argument, advanced by Ned Davis of Ned Davis Research, that the approach works primarily during secular (long-term) bull markets. One of the hallmarks of cyclical (shorter-term) bull markets, according to Davis, is that during them, trend-following systems tend not to work. (Read my Sept. 1, 2009 column on Davis' argument.)
Given these apparent defects, you might think that doing better than the 200-day moving average would have been relatively easy, especially in recent years. But it hasn't been.
We know because Fabian the Younger has been trying to improve on it, almost from the point he took over the advisory service from his father in the early 1990s. On balance, his deviations from the mechanical 39-week moving average system have cost his model portfolio.
Monday, June 07, 2010
The Dilbert Portfolio
When I heard that BP (BP, news, msgs) was destroying a big portion of Earth, with no serious discussion of cutting their dividend, I had two thoughts: 1) I hate them, and 2) This would be an excellent time to buy their stock. And so I did. Although I should have waited a week.
People ask me how it feels to take the side of moral bankruptcy. Answer: Pretty good! Thanks for asking. How's it feel to be a disgruntled victim?
I have a theory that you should invest in the companies that you hate the most. The usual reason for hating a company is that the company is so powerful it can make you balance your wallet on your nose while you beg for their product. Oil companies such as BP don't actually make you beg for oil, but I think we all realize that they could. It's implied in the price of gas.
Perhaps you think it's absurd to invest in companies just because you hate them. But let's compare my method to all of the other ways you could decide where to invest.
Technical analysis
Technical analysis involves studying graphs of stock movement over time as a way to predict future moves.
It's a widely used method on Wall Street, and it has exactly the same scientific validity as pretending you are a witch and forecasting market moves from chicken droppings.
Identify well-managed companies
When companies make money, we assume they are well-managed. That perception is reinforced by the CEOs of those companies who are happy to tell you all the clever things they did to make it happen.
The problem with relying on this source of information is that CEOs are highly skilled in a special form of lying called leadership. Leadership involves convincing employees and investors that the CEO has something called a vision, a type of optimistic hallucination that can come true only in an environment in which the CEO is massively overcompensated and the employees have learned to be less selfish.
Track records
Perhaps you can safely invest in companies that have a long history of being profitable. That sounds safe and reasonable, right?
The problem is that every investment expert knows two truths about investing: 1) Past performance is no indication of future performance. 2) You need to consider a company's track record.
Right, yes, those are opposites. And it's pretty much all that anyone knows about investing. An investment professional can argue for any sort of investment decision by selectively ignoring either point 1 or 2. And for that you will pay the investment professional 1% to 2% of your portfolio value annually, no matter the performance.
Buy companies you love
Instead of investing in companies you hate, as I have suggested, perhaps you could invest in companies you love.
I once hired professional money managers at Wells Fargo (WFC, news, msgs) to do essentially that for me. As part of their service they promised to listen to the dopey-happy hallucinations of professional liars (CEOs) and be gullible on my behalf. The pros at Wells Fargo bought for my portfolio Enron, WorldCom and a number of other much-loved companies that soon went out of business.
For that, I hate Wells Fargo. But I sure wish I had bought stock in Wells Fargo at the time I hated them the most, because Wells Fargo itself performed great. See how this works?
Do your own research
I didn't let Wells Fargo manage my entire portfolio, thanks to my native distrust of all humanity. For the other half of my portfolio I did my own research. (Imagine a field of red flags, all wildly waving. I didn't notice them.)
My favorite investment was in a company I absolutely loved. I loved their business model. I loved their mission. I loved how they planned to make our daily lives easier. They were simply adorable as they struggled to change an entrenched industry. Their leaders reported that the company had finally turned cash positive in one key area, thus validating their business model, and proving that the future was rosy. I doubled down. The company was Webvan, may it rest in peace.
But what about Warren Buffett?
The argument goes that if Warren Buffett can buy quality companies at reasonable prices, hold them for the long term and become a billionaire, then so can you.
Do you know who would be the first person to tell you that you aren't smart enough or well-informed enough to pull that off? His name is Warren Buffett.
OK, he's probably too nice to say that, but I'm pretty sure he's thinking it. However, he might tell you that he makes his money by knowing things that other people don't know, and buying things that other people can't buy, such as entire companies.
-- by Scott Adams
People ask me how it feels to take the side of moral bankruptcy. Answer: Pretty good! Thanks for asking. How's it feel to be a disgruntled victim?
I have a theory that you should invest in the companies that you hate the most. The usual reason for hating a company is that the company is so powerful it can make you balance your wallet on your nose while you beg for their product. Oil companies such as BP don't actually make you beg for oil, but I think we all realize that they could. It's implied in the price of gas.
Perhaps you think it's absurd to invest in companies just because you hate them. But let's compare my method to all of the other ways you could decide where to invest.
Technical analysis
Technical analysis involves studying graphs of stock movement over time as a way to predict future moves.
It's a widely used method on Wall Street, and it has exactly the same scientific validity as pretending you are a witch and forecasting market moves from chicken droppings.
Identify well-managed companies
When companies make money, we assume they are well-managed. That perception is reinforced by the CEOs of those companies who are happy to tell you all the clever things they did to make it happen.
The problem with relying on this source of information is that CEOs are highly skilled in a special form of lying called leadership. Leadership involves convincing employees and investors that the CEO has something called a vision, a type of optimistic hallucination that can come true only in an environment in which the CEO is massively overcompensated and the employees have learned to be less selfish.
Track records
Perhaps you can safely invest in companies that have a long history of being profitable. That sounds safe and reasonable, right?
The problem is that every investment expert knows two truths about investing: 1) Past performance is no indication of future performance. 2) You need to consider a company's track record.
Right, yes, those are opposites. And it's pretty much all that anyone knows about investing. An investment professional can argue for any sort of investment decision by selectively ignoring either point 1 or 2. And for that you will pay the investment professional 1% to 2% of your portfolio value annually, no matter the performance.
Buy companies you love
Instead of investing in companies you hate, as I have suggested, perhaps you could invest in companies you love.
I once hired professional money managers at Wells Fargo (WFC, news, msgs) to do essentially that for me. As part of their service they promised to listen to the dopey-happy hallucinations of professional liars (CEOs) and be gullible on my behalf. The pros at Wells Fargo bought for my portfolio Enron, WorldCom and a number of other much-loved companies that soon went out of business.
For that, I hate Wells Fargo. But I sure wish I had bought stock in Wells Fargo at the time I hated them the most, because Wells Fargo itself performed great. See how this works?
Do your own research
I didn't let Wells Fargo manage my entire portfolio, thanks to my native distrust of all humanity. For the other half of my portfolio I did my own research. (Imagine a field of red flags, all wildly waving. I didn't notice them.)
My favorite investment was in a company I absolutely loved. I loved their business model. I loved their mission. I loved how they planned to make our daily lives easier. They were simply adorable as they struggled to change an entrenched industry. Their leaders reported that the company had finally turned cash positive in one key area, thus validating their business model, and proving that the future was rosy. I doubled down. The company was Webvan, may it rest in peace.
But what about Warren Buffett?
The argument goes that if Warren Buffett can buy quality companies at reasonable prices, hold them for the long term and become a billionaire, then so can you.
Do you know who would be the first person to tell you that you aren't smart enough or well-informed enough to pull that off? His name is Warren Buffett.
OK, he's probably too nice to say that, but I'm pretty sure he's thinking it. However, he might tell you that he makes his money by knowing things that other people don't know, and buying things that other people can't buy, such as entire companies.
-- by Scott Adams
Wednesday, June 02, 2010
Tuesday, June 01, 2010
Extraordinary Popular Delusions
Extraordinary Popular Delusions and the Madness of Crowds by Charles Mackey is considered must-reading by many investment professionals. The material is classic, but I found the writing archaic and the reading of it sometimes ponderous. (After all, it was written in 1841.) The book is available for free on the internet, for example at
I found Richard Band's summary of the pertinent sections of the book much more readable (and shorter). That summary is found in Chapter 2 of his book Contrary Investing. It's out of print but you can get it cheap used at Amazon.
[via value_investment_thoughts 7/31/05 (that long ago?) since I'm considering swapping my mostly unread copy at paperbackswap]
Hmmm.. that link no longer works (though it's sort of still at archive.org). Try this one (linked from wikipedia)
Friday, May 21, 2010
Senate passes financial reform
The U.S. Senate voted 59-39 late Thursday to pass the most sweeping financial reform legislation since the Great Depression in an effort to prevent a repeat of the financial crisis of 2008.
The bill would create a consumer protection agency, place new capital restrictions on banks and increase oversight of derivatives trading. Critics have slammed the bill for not addressing Fannie Mae (FNM) and Freddie Mac (FRE), the government-backed mortgage companies that many say contributed to the financial market meltdown.
Four Republicans voted for the bill, and two Democrats voted against it. The legislation will now have to be reconciled with the House version, then both chambers of Congress will vote on the final bill.
Wednesday, May 19, 2010
Klarman can see another lost decade
BOSTON, May 18 (Reuters) - Star hedge fund manager Seth Klarman sees few bargains in the current environment and predicted on Tuesday that the stock market could suffer another lost decade without any gains.
"Given the recent run-up, I'd be worried that we'll have another 10 years of zero returns," Klarman, who rarely speaks in public, said at the CFA Institute's annual conference in Boston.
Current market conditions remind Klarman of a Hostess Twinkie snack cake because "everything is being manipulated by the government" and appears "artificial."
"I'm more worried about the world broadly than I've ever been in my whole career," Klarman said.
Klarman has 30 percent of assets at his $22 billion Baupost Group in cash, he said. He started the firm in 1982 with $27 million and has averaged 20 percent annual gains ever since. In 2007, amid the depths of the credit crash, Baupost had its best year, gaining 52 percent.
Inflation is a risk that Klarman said he is particularly concerned with given the government's high rate of borrowing to bail out the financial system. Baupost has purchased far out-of-the-money puts on bonds to hedge the risk, he said.
The puts, which Klarman said he viewed as "cheap insurance," will expire worthless even if long-term interest rates rise to 6 or 7 percent. But if rates rise to 10 percent, Baupost would make large gains, and if rates exceed 20 percent the firm could make 50 or 100 times its outlay.
Typically, Baupost focuses on out-of-favor stocks and bonds. Klarman cleaned up in 2007 and 2008 buying distressed debt and mortgage securities that later recovered.
One area Klarman said he is currently scouring for potential investments is private commercial real estate below the top quality. Publicly traded real estate investment trusts, however, have "rallied enormously" and are "quite unattractive," he said.
Copies of Klarman's long out-of-print investment guide, "Margin of Safety," sell at auction for $700 or more. Klarman said on Tuesday he has "no immediate plan" to reissue the book published in 1991 because he does not have enough free time to update it or even to write a fresh introduction.
[via chucks_angels]
"Given the recent run-up, I'd be worried that we'll have another 10 years of zero returns," Klarman, who rarely speaks in public, said at the CFA Institute's annual conference in Boston.
Current market conditions remind Klarman of a Hostess Twinkie snack cake because "everything is being manipulated by the government" and appears "artificial."
"I'm more worried about the world broadly than I've ever been in my whole career," Klarman said.
Klarman has 30 percent of assets at his $22 billion Baupost Group in cash, he said. He started the firm in 1982 with $27 million and has averaged 20 percent annual gains ever since. In 2007, amid the depths of the credit crash, Baupost had its best year, gaining 52 percent.
Inflation is a risk that Klarman said he is particularly concerned with given the government's high rate of borrowing to bail out the financial system. Baupost has purchased far out-of-the-money puts on bonds to hedge the risk, he said.
The puts, which Klarman said he viewed as "cheap insurance," will expire worthless even if long-term interest rates rise to 6 or 7 percent. But if rates rise to 10 percent, Baupost would make large gains, and if rates exceed 20 percent the firm could make 50 or 100 times its outlay.
Typically, Baupost focuses on out-of-favor stocks and bonds. Klarman cleaned up in 2007 and 2008 buying distressed debt and mortgage securities that later recovered.
One area Klarman said he is currently scouring for potential investments is private commercial real estate below the top quality. Publicly traded real estate investment trusts, however, have "rallied enormously" and are "quite unattractive," he said.
Copies of Klarman's long out-of-print investment guide, "Margin of Safety," sell at auction for $700 or more. Klarman said on Tuesday he has "no immediate plan" to reissue the book published in 1991 because he does not have enough free time to update it or even to write a fresh introduction.
[via chucks_angels]
Friday, May 14, 2010
Eddy Elfenbein on gold
What you need to understand about investing in gold is that you’re not really investing in gold. You’re investing against the U.S. dollar. It’s not that gold goes up, it’s that the value of a dollar goes down.
Actually, it’s even more subtle than that. What you’re doing is you’re betting against the interest rate on the dollar. I know this sounds odd, but any currency you carry around in your wallet has an interest tied to it. That’s essentially what the currency is—that rate—and it’s the reason why anyone would want to use it. Gold can be seen as the way to keep all those currencies honest.
People mistakenly believe that gold is all about inflation. That’s not quite it, but high inflation is usually very helpful for gold. What gold really likes is to see is very low real (meaning after inflation) interest rates. Gold is almost like a highly-leveraged short on short-term TIPs.
Here’s a good rule of thumb. Gold goes up anytime real rates on short-term U.S. debt are below 2% (or are perceived to stay below 2%). It will fall if real rates rise above 2%. When rates are at 2%, then gold holds steady. That’s not a perfect relationship but I want to put it in an easy why for new investors to grap. This also helps explain why we’re in the odd situation today of seeing gold rise even though inflation is low. It’s not the inflation, it’s the low real rates that gold likes.
[via maverick@investwise]
Actually, it’s even more subtle than that. What you’re doing is you’re betting against the interest rate on the dollar. I know this sounds odd, but any currency you carry around in your wallet has an interest tied to it. That’s essentially what the currency is—that rate—and it’s the reason why anyone would want to use it. Gold can be seen as the way to keep all those currencies honest.
People mistakenly believe that gold is all about inflation. That’s not quite it, but high inflation is usually very helpful for gold. What gold really likes is to see is very low real (meaning after inflation) interest rates. Gold is almost like a highly-leveraged short on short-term TIPs.
Here’s a good rule of thumb. Gold goes up anytime real rates on short-term U.S. debt are below 2% (or are perceived to stay below 2%). It will fall if real rates rise above 2%. When rates are at 2%, then gold holds steady. That’s not a perfect relationship but I want to put it in an easy why for new investors to grap. This also helps explain why we’re in the odd situation today of seeing gold rise even though inflation is low. It’s not the inflation, it’s the low real rates that gold likes.
[via maverick@investwise]
Sunday, May 09, 2010
Bogle's new old idea
With all of the high-priced creative and imaginative talent in this industry, I find myself wondering why someone, somewhere, hasn't dreamed up a still better way to enhance after-tax mutual fund returns. Surely the opportunities abound. Let me describe my own idea. I start with a fund that simply buys a large sampling of high quality blue chip growth stocks, and holds them unless fundamental circumstances change radically. Where, you ask, do we find the budding Warren Buffett to manage it? Honestly, I don't know. So, I shift gears. Why not a fund that buys, say the 50 largest stocks in the S&P Growth Index universe? (That's nearly 30% of the capitalization of the entire stock market.) Simply hold them "forever" and don't rebalance as prices change. If there is a merger, keep the merged company; if a company is bought for cash, reinvest the proceeds, either in the next largest company or in the fund's other holdings (it probably won't matter which you do); if it fails and goes out of business, well, just realize that can happen.
Then, run the fund at an expense ratio of 20 basis points, just incurring bare-bones operating costs. Minimize exposure to shareholder redemptions with a stiff redemption fee and/or strong limitations on daily liquidity (i.e., open the fund for redemption only, say, on the last day of each quarter). These latter steps will, of course, make it difficult to attract quick-triggered opportunists. That's good! But—over time—they will make it commensurately easy to attract serious long-term investors (today, an endangered species). The rewards for them should be far larger than the risks.
The potential rewards, in fact, are huge. In a stock market which averages a 10% pretax return, an average fund, assuming a 2% expense ratio, should provide a pretax return of 8.0% and an after-tax return of 6.5%. A low-cost buy-and-hold fund with a 10% gross return and expenses of 0.2% should achieve a net return of 9.8% before taxes and 9.0% after taxes. (This is a conservative hypothesis, with an after-tax spread of 2.5% that is well below the shortfall of 3.3% that actually existed between active funds and the S&P 500 Index during the past 15 years.)
For the long-term investor, these numbers would be little short of dynamite. $100,000 invested at the outset would, after 25 years and after all taxes, have grown in the actively managed fund to $483,000. But the buy-and-hold fund would have almost doubled that amount to $862,000. I guess it's fair to conclude: "Yes, costs and taxes matter."
-- John Bogle, 11/12/97
[via rcthacker@chucks_angels]
Then, run the fund at an expense ratio of 20 basis points, just incurring bare-bones operating costs. Minimize exposure to shareholder redemptions with a stiff redemption fee and/or strong limitations on daily liquidity (i.e., open the fund for redemption only, say, on the last day of each quarter). These latter steps will, of course, make it difficult to attract quick-triggered opportunists. That's good! But—over time—they will make it commensurately easy to attract serious long-term investors (today, an endangered species). The rewards for them should be far larger than the risks.
The potential rewards, in fact, are huge. In a stock market which averages a 10% pretax return, an average fund, assuming a 2% expense ratio, should provide a pretax return of 8.0% and an after-tax return of 6.5%. A low-cost buy-and-hold fund with a 10% gross return and expenses of 0.2% should achieve a net return of 9.8% before taxes and 9.0% after taxes. (This is a conservative hypothesis, with an after-tax spread of 2.5% that is well below the shortfall of 3.3% that actually existed between active funds and the S&P 500 Index during the past 15 years.)
For the long-term investor, these numbers would be little short of dynamite. $100,000 invested at the outset would, after 25 years and after all taxes, have grown in the actively managed fund to $483,000. But the buy-and-hold fund would have almost doubled that amount to $862,000. I guess it's fair to conclude: "Yes, costs and taxes matter."
-- John Bogle, 11/12/97
[via rcthacker@chucks_angels]
Friday, May 07, 2010
nearly half don't pay income tax
Tax Day is a dreaded deadline for millions of Americans, but for nearly half of U.S. households, it's simply somebody else's problem.
About 47% will pay no federal income taxes for 2009. Either their incomes were too low, or they qualified for enough credits, deductions and exemptions to eliminate their liability. That's according to projections by the Tax Policy Center, a Washington research organization.
In recent years, credits for low- and middle-income families have grown so much that a family of four making as much as $50,000 will owe no federal income tax for 2009, as long as there are two children younger than 17, according to a separate analysis by the consulting firm Deloitte Tax.
Tax cuts enacted in the past decade have been generous to wealthy taxpayers, too, making them a target for President Barack Obama and Democrats in Congress. Less noticed were tax cuts for low- and middle-income families, which were expanded when Obama signed the massive economic recovery package last year.
The result is a tax system that exempts almost half the U.S. from paying for programs that benefit everyone, including national defense, public safety, infrastructure and education. It is a system in which the top 10% of earners — households making an average of $366,400 in 2006 — paid about 73% of the income taxes collected by the federal government.
The bottom 40%, on average, make a profit from the federal income tax system, meaning they get more money in tax credits than they would otherwise owe in taxes. For those people, the government sends them a payment.
The vast majority of people who escape federal income taxes do pay other taxes, including federal payroll taxes for Social Security and Medicare, and excise taxes on gasoline, aviation, alcohol and cigarettes. Many also pay state or local sales, income and property taxes.
About 47% will pay no federal income taxes for 2009. Either their incomes were too low, or they qualified for enough credits, deductions and exemptions to eliminate their liability. That's according to projections by the Tax Policy Center, a Washington research organization.
In recent years, credits for low- and middle-income families have grown so much that a family of four making as much as $50,000 will owe no federal income tax for 2009, as long as there are two children younger than 17, according to a separate analysis by the consulting firm Deloitte Tax.
Tax cuts enacted in the past decade have been generous to wealthy taxpayers, too, making them a target for President Barack Obama and Democrats in Congress. Less noticed were tax cuts for low- and middle-income families, which were expanded when Obama signed the massive economic recovery package last year.
The result is a tax system that exempts almost half the U.S. from paying for programs that benefit everyone, including national defense, public safety, infrastructure and education. It is a system in which the top 10% of earners — households making an average of $366,400 in 2006 — paid about 73% of the income taxes collected by the federal government.
The bottom 40%, on average, make a profit from the federal income tax system, meaning they get more money in tax credits than they would otherwise owe in taxes. For those people, the government sends them a payment.
The vast majority of people who escape federal income taxes do pay other taxes, including federal payroll taxes for Social Security and Medicare, and excise taxes on gasoline, aviation, alcohol and cigarettes. Many also pay state or local sales, income and property taxes.
424 Dividend Boost
I got this blurb from Stansberry Research as a sponsor to the Zacks.com Profit From The Pros email letter that I receive.
While most folks earn tiny 2%-6% dividends on Blue Chips (like Pepsi, Johnson & Johnson, and AT&T) savvy Americans are secretly "boosting" those small yields to dizzying heights – earning incredible 30%-50% on the exact same shares. Originally available only to executives at America's richest Blue Chip firms, this income secret is now available to regular folks like you and me.
How the heck is it possible to make 10 to 20-times more than "normal" dividends?
Pretty simple actually.
I'll show you...
"The Best-Kept Secret on Wall Street"
~The Wall Street Journal
Right now you can "boost" an ordinary miniscule dividend yield to 20%... 30%... even 40% or more simply by taking advantage of what was once an obscure corporate perk...
Don't worry, you don't have to use options or sell covered calls... or anything tricky or speculative like that. It simply takes one small but radical change in the way most people buy ordinary stocks. It's a perk Fortune 500 employees have been taking advantage of for decades.
I call it the "424 Dividend Boost." And I first learned about this benefit after spending several years working at one of the companies' that offers it, Citigroup.
Working there, I saw firsthand how this secret enabled co-workers and some in-the-know shareholders to earn an enormous 34% on their initial stake—while most other folks were getting the company's regular 2% dividend.
Best of all, The 424 Dividend Boost Research Report is absolutely free of charge.
The only thing I ask in return is that you try my monthly dividend research advisory called The 12% Letter.
* * *
Sounds too good to be true. But that's because of the way they wrote it.
Looking it up, here's what the Stock Gumshoe has to say
Sounds pretty nice, eh?
I haven’t written about the ads from Stansberry & Associates too much lately, though they may be the most aggressive marketers out there … but in recent weeks I’ve seen lots of ads for Tom Dyson’s 12% Letter from Stansberry, and had several questions about what they’re calling the “424 Dividend Boost.”
So let’s have a look, shall we?
We get several examples from Dyson to support the incredible claims — the three claims at the top of the ad are as follows:
“Johnson and Johnson:
Current yield: 2.7%
With the “Dividend Boost”: 39%
“AT&T:
Current Yield: 5%
With the “Dividend Boost”: 43%
“PepsiCo:
Current Yield: 2.4%
With the “Dividend Boost”: 53%”
Sounds unbelievable, doesn’t it?
But it is, in part, real …
You see, the “424 Dividend Boost” is nothing but another iteration of what Dyson used to call the “801K Plan” — it’s a teaser for investing in Dividend Reinvestment Plans, or DRIPs.
Using this strategy, you could certainly have put down an initial investment a few decades ago in a stock, like Johnson and Johnson or AT&T, and reinvested your dividends, to the point that the dividend you receive today is equivalent to a 40% or even much higher yield on your original investment.
That’s because of two things — raising dividends, and the compounding from dividend reinvestment. Most large American companies that pay dividends try very hard to raise those dividends every year, or at least keep them stable in bad years. That means if you bought shares in Johnson and Johnson back in 1970, for example, you would have received an annual dividend of just under a penny a share. Today, the annual dividend for JNJ is $1.84, so that’s incredible growth right there.
But the real power comes from dividend reinvestment — as those dividends climbed over close to 40 years, you could have turned each one into more fractional shares of JNJ, and the following quarter those fractional shares would have entitled you to slightly more dividend, so each quarter you would both add to your number of shares, and increase the dividend payment on each of those shares, which builds upon itself like compound interest, the force that Albert Einstein is reputed to have said (he almost certainly didn’t) is the most powerful force in the universe.
While most folks earn tiny 2%-6% dividends on Blue Chips (like Pepsi, Johnson & Johnson, and AT&T) savvy Americans are secretly "boosting" those small yields to dizzying heights – earning incredible 30%-50% on the exact same shares. Originally available only to executives at America's richest Blue Chip firms, this income secret is now available to regular folks like you and me.
How the heck is it possible to make 10 to 20-times more than "normal" dividends?
Pretty simple actually.
I'll show you...
"The Best-Kept Secret on Wall Street"
~The Wall Street Journal
Right now you can "boost" an ordinary miniscule dividend yield to 20%... 30%... even 40% or more simply by taking advantage of what was once an obscure corporate perk...
Don't worry, you don't have to use options or sell covered calls... or anything tricky or speculative like that. It simply takes one small but radical change in the way most people buy ordinary stocks. It's a perk Fortune 500 employees have been taking advantage of for decades.
I call it the "424 Dividend Boost." And I first learned about this benefit after spending several years working at one of the companies' that offers it, Citigroup.
Working there, I saw firsthand how this secret enabled co-workers and some in-the-know shareholders to earn an enormous 34% on their initial stake—while most other folks were getting the company's regular 2% dividend.
Best of all, The 424 Dividend Boost Research Report is absolutely free of charge.
The only thing I ask in return is that you try my monthly dividend research advisory called The 12% Letter.
* * *
Sounds too good to be true. But that's because of the way they wrote it.
Looking it up, here's what the Stock Gumshoe has to say
Sounds pretty nice, eh?
I haven’t written about the ads from Stansberry & Associates too much lately, though they may be the most aggressive marketers out there … but in recent weeks I’ve seen lots of ads for Tom Dyson’s 12% Letter from Stansberry, and had several questions about what they’re calling the “424 Dividend Boost.”
So let’s have a look, shall we?
We get several examples from Dyson to support the incredible claims — the three claims at the top of the ad are as follows:
“Johnson and Johnson:
Current yield: 2.7%
With the “Dividend Boost”: 39%
“AT&T:
Current Yield: 5%
With the “Dividend Boost”: 43%
“PepsiCo:
Current Yield: 2.4%
With the “Dividend Boost”: 53%”
Sounds unbelievable, doesn’t it?
But it is, in part, real …
You see, the “424 Dividend Boost” is nothing but another iteration of what Dyson used to call the “801K Plan” — it’s a teaser for investing in Dividend Reinvestment Plans, or DRIPs.
Using this strategy, you could certainly have put down an initial investment a few decades ago in a stock, like Johnson and Johnson or AT&T, and reinvested your dividends, to the point that the dividend you receive today is equivalent to a 40% or even much higher yield on your original investment.
That’s because of two things — raising dividends, and the compounding from dividend reinvestment. Most large American companies that pay dividends try very hard to raise those dividends every year, or at least keep them stable in bad years. That means if you bought shares in Johnson and Johnson back in 1970, for example, you would have received an annual dividend of just under a penny a share. Today, the annual dividend for JNJ is $1.84, so that’s incredible growth right there.
But the real power comes from dividend reinvestment — as those dividends climbed over close to 40 years, you could have turned each one into more fractional shares of JNJ, and the following quarter those fractional shares would have entitled you to slightly more dividend, so each quarter you would both add to your number of shares, and increase the dividend payment on each of those shares, which builds upon itself like compound interest, the force that Albert Einstein is reputed to have said (he almost certainly didn’t) is the most powerful force in the universe.
Buffett the lazy way
But why not just buy what Warren buys? I set out in this writing to examine whether following Berkshire Hathaway's investments utilizing Form 13Fs could offer the investor the opportunity to piggyback on Buffett's stock picks, and consequently, achieve outsized excess returns.
Buffett's current clone portfolio would be: Coca-Cola Company (KO), Wells Fargo (WFC), American Express (AXP), Procter & Gamble (PG), Kraft Foods (KFT), Wal-Mart Stores (WMT), Wesco Financial (WSC), ConocoPhillips (COP), Johnson & Johnson (JNJ), and U.S. Bancorp (USB).
Buffett returns more than 8% a year, which doesn't sound that spectacular but $100,000 invested in the Buffett portfolio would be worth approximately $240,000 today vs. about $100,000 invested in the S&P500. About 85% of Buffet's portfolio is concentrated in his top ten holdings. Volatility was low, surprising given that the portfolio contained only 10 holdings.
If you ran a mutual fund with these numbers you would be one of the best performing mangers in the U.S. over the time period. A recent academic paper has examined the strategy for Buffett all the way back to 1976 and found results consistent with mine. From the abstract: Contrary to popular belief, we find Berkshire Hathaway invests primarily in large-cap growth rather than "value" stocks.
Over the period the portfolio beat the benchmarks in 27 out of 31 years, on average exceeding the S&P 500 Index by 11.14%. We find that Berkshire Hathaway's portfolio is concentrated in relatively few stocks with the top five holdings averaging 73% of the portfolio value. While increased volatility is normally associated with higher concentration we show the volatility of the portfolio is driven by large positive returns and not downside risk.
-- via Warren Buffett International Fan Club
Buffett's current clone portfolio would be: Coca-Cola Company (KO), Wells Fargo (WFC), American Express (AXP), Procter & Gamble (PG), Kraft Foods (KFT), Wal-Mart Stores (WMT), Wesco Financial (WSC), ConocoPhillips (COP), Johnson & Johnson (JNJ), and U.S. Bancorp (USB).
Buffett returns more than 8% a year, which doesn't sound that spectacular but $100,000 invested in the Buffett portfolio would be worth approximately $240,000 today vs. about $100,000 invested in the S&P500. About 85% of Buffet's portfolio is concentrated in his top ten holdings. Volatility was low, surprising given that the portfolio contained only 10 holdings.
If you ran a mutual fund with these numbers you would be one of the best performing mangers in the U.S. over the time period. A recent academic paper has examined the strategy for Buffett all the way back to 1976 and found results consistent with mine. From the abstract: Contrary to popular belief, we find Berkshire Hathaway invests primarily in large-cap growth rather than "value" stocks.
Over the period the portfolio beat the benchmarks in 27 out of 31 years, on average exceeding the S&P 500 Index by 11.14%. We find that Berkshire Hathaway's portfolio is concentrated in relatively few stocks with the top five holdings averaging 73% of the portfolio value. While increased volatility is normally associated with higher concentration we show the volatility of the portfolio is driven by large positive returns and not downside risk.
-- via Warren Buffett International Fan Club
Thursday, May 06, 2010
Dow down 999
The Dow Jones Industrial Average posted its biggest intraday loss since the market crash of 1987, the euro slid to a 14-month low and yields on Greek, Spanish and Italian bonds surged on concern European leaders aren’t doing enough to stem the region’s debt crisis. U.S. Treasuries surged.
“It’s panic selling,” said Burt White, chief investment officer at LPL Financial in Boston, which oversees $379 billion. “There’s concern that the European situation might cool down global growth and freeze the credit markets.”
The Dow average lost as much as 998.5 points, or 9.2 percent, before paring its drop to 383.17 points at 3:40 p.m. in New York. The Standard & Poor’s 500 Index fell as much as 8.6 percent, its biggest plunge since December 2008, before trimming its decline to 3.5 percent.
***
The selling was a result of technical glitches that caused some stocks, including Dow component Procter & Gamble (PG, Fortune 500), to plunge 37% to $39.37 per share from the close of $62.12 Wednesday. The consumer products maker recovered most of that loss by the close, ending just 2% lower.
But the faulty P&G trading was responsible for 172 of the 998.50 points that the Dow Jones industrial average (INDU) lost at its worst, the biggest one-day point decline on an intraday basis in Dow Jones history.
“It’s panic selling,” said Burt White, chief investment officer at LPL Financial in Boston, which oversees $379 billion. “There’s concern that the European situation might cool down global growth and freeze the credit markets.”
The Dow average lost as much as 998.5 points, or 9.2 percent, before paring its drop to 383.17 points at 3:40 p.m. in New York. The Standard & Poor’s 500 Index fell as much as 8.6 percent, its biggest plunge since December 2008, before trimming its decline to 3.5 percent.
***
The selling was a result of technical glitches that caused some stocks, including Dow component Procter & Gamble (PG, Fortune 500), to plunge 37% to $39.37 per share from the close of $62.12 Wednesday. The consumer products maker recovered most of that loss by the close, ending just 2% lower.
But the faulty P&G trading was responsible for 172 of the 998.50 points that the Dow Jones industrial average (INDU) lost at its worst, the biggest one-day point decline on an intraday basis in Dow Jones history.
China crash coming?
Investor Marc Faber said China’s economy will slow and possibly “crash” within a year as declines in stock and commodity prices signal the nation’s property bubble is set to burst.
The Shanghai Composite Index has failed to regain its 2009 high while industrial commodities and shares of Australian resource exporters are acting “heavy,” Faber said. The opening of the World Expo in Shanghai last week is “not a particularly good omen,” he said, citing a property bust and depression that followed the 1873 World Exhibition in Vienna.
“The market is telling you that something is not quite right,” Faber, the publisher of the Gloom, Boom & Doom report, said in a Bloomberg Television interview in Hong Kong today. “The Chinese economy is going to slow down regardless. It is more likely that we will even have a crash sometime in the next nine to 12 months.”
Faber joins hedge fund manager Jim Chanos and Harvard University’s Kenneth Rogoff in warning of a crash in China.
China is “on a treadmill to hell” because it’s hooked on property development for driving growth, Chanos said in an interview last month. As much as 60 percent of the country’s gross domestic product relies on construction, he said. Rogoff said in February a debt-fueled bubble in China may trigger a regional recession within a decade.
[via Maverick@investwise]
The Shanghai Composite Index has failed to regain its 2009 high while industrial commodities and shares of Australian resource exporters are acting “heavy,” Faber said. The opening of the World Expo in Shanghai last week is “not a particularly good omen,” he said, citing a property bust and depression that followed the 1873 World Exhibition in Vienna.
“The market is telling you that something is not quite right,” Faber, the publisher of the Gloom, Boom & Doom report, said in a Bloomberg Television interview in Hong Kong today. “The Chinese economy is going to slow down regardless. It is more likely that we will even have a crash sometime in the next nine to 12 months.”
Faber joins hedge fund manager Jim Chanos and Harvard University’s Kenneth Rogoff in warning of a crash in China.
China is “on a treadmill to hell” because it’s hooked on property development for driving growth, Chanos said in an interview last month. As much as 60 percent of the country’s gross domestic product relies on construction, he said. Rogoff said in February a debt-fueled bubble in China may trigger a regional recession within a decade.
[via Maverick@investwise]
Monday, April 26, 2010
marrying for dividends
Find a Life Partner Who Agrees on Money Matters
Marriages nowadays face a lot of obstacles. According to a recent study, spouses who feel their partner spends money foolishly have a 45% higher than average divorce rate. After extramarital affairs and alcohol/drug abuse, financial disputes are the third most common risk factor in marriages that break up.
Get to know your fiancé’s thoughts on money before you say “I do.” If you don’t like what you discover, say “I don’t.” During our courtship, Enid struck me as the thriftiest person I had ever met (next to my old buddy Smokey Johnson, who always ordered a 10-cent Fishwich at McDonald’s). From the start, I knew that marrying her was like collecting an extra dividend check every day of my life. We’ve never argued about how much to spend, only how little!
-- Richard Band in the May 2010 Profitable Investing
Marriages nowadays face a lot of obstacles. According to a recent study, spouses who feel their partner spends money foolishly have a 45% higher than average divorce rate. After extramarital affairs and alcohol/drug abuse, financial disputes are the third most common risk factor in marriages that break up.
Get to know your fiancé’s thoughts on money before you say “I do.” If you don’t like what you discover, say “I don’t.” During our courtship, Enid struck me as the thriftiest person I had ever met (next to my old buddy Smokey Johnson, who always ordered a 10-cent Fishwich at McDonald’s). From the start, I knew that marrying her was like collecting an extra dividend check every day of my life. We’ve never argued about how much to spend, only how little!
-- Richard Band in the May 2010 Profitable Investing
Friday, April 23, 2010
profitable bank bailouts
Bank bailouts are turning out to be great business for the government. Unfortunately for taxpayers, other federal rescues will almost certainly wind up in the red.
The Treasury Department said Monday it will begin selling its stake in Citigroup at a potential profit of about $7.5 billion -- not a bad haul for an 18-month investment.
The move is a major step in the government's effort to unravel investments it made in banks under the $700-billion Troubled Asset Relief Program at the height of the financial crisis.
Yet a year and a half after Congress passed the big bailout, other parts of it — particularly troubled automakers General Motors and Chrysler and insurer American International Group — show no signs of being profitable.
Despite the returns from Citi and other banks, analysts and even the Treasury Department predict the bailout will wind up costing taxpayers at least $100 billion. The bailouts of mortgage giants Fannie Mae and Freddie Mac, which were not included in TARP, will add billions more.
But the money the government makes off banks helps offset the damage. With the sale of the Citi shares, the eight major banks that got bailout money funds will have repaid the government in full. Those investments have netted the government $15.4 billion from dividends, interest and the sale of bank stock warrants, which gave the government the right to buy stock in the future at a fixed price.
Based on Monday's share price, selling its 27% stake in Citi would add about $7.5 billion in profits. The stock fell 3% to $4.18 a share Monday after news of the planned Treasury sales. But that still puts it well above the $3.25 a share the government paid.
The Treasury Department said Monday it will begin selling its stake in Citigroup at a potential profit of about $7.5 billion -- not a bad haul for an 18-month investment.
The move is a major step in the government's effort to unravel investments it made in banks under the $700-billion Troubled Asset Relief Program at the height of the financial crisis.
Yet a year and a half after Congress passed the big bailout, other parts of it — particularly troubled automakers General Motors and Chrysler and insurer American International Group — show no signs of being profitable.
Despite the returns from Citi and other banks, analysts and even the Treasury Department predict the bailout will wind up costing taxpayers at least $100 billion. The bailouts of mortgage giants Fannie Mae and Freddie Mac, which were not included in TARP, will add billions more.
But the money the government makes off banks helps offset the damage. With the sale of the Citi shares, the eight major banks that got bailout money funds will have repaid the government in full. Those investments have netted the government $15.4 billion from dividends, interest and the sale of bank stock warrants, which gave the government the right to buy stock in the future at a fixed price.
Based on Monday's share price, selling its 27% stake in Citi would add about $7.5 billion in profits. The stock fell 3% to $4.18 a share Monday after news of the planned Treasury sales. But that still puts it well above the $3.25 a share the government paid.
Thursday, April 22, 2010
buy signal
If the trend is your friend, as the Wall Street cliché goes, then the stock market has been an incredibly friendly place of late.
What I have in mind is a rare buy signal that was generated a couple of weeks ago by a trend-following indicator with a good long-term record. Prior to the recent buy signal, there had been only 12 of them since 1967.
And two of those 12 prior buy signals occurred in the last 12 months alone. In other words, between 1967 and March 2009, this indicator gave just 10 buy signals -- an average of just one every 4.3 years. Since March 2009, in contrast, they have averaged once every four months or so.
The indicator in question comes from Ned Davis Research, the quantitative research firm. It generates a buy signal whenever the percentage of common stocks trading above their 50-day moving averages rises above 90%. Davis refers to such events as a "breadth thrust."
The recent buy signal, according to this indicator, occurred on April 5. The other buy signals over the last year occurred on May 4 and Sep. 16 of last year.
What I have in mind is a rare buy signal that was generated a couple of weeks ago by a trend-following indicator with a good long-term record. Prior to the recent buy signal, there had been only 12 of them since 1967.
And two of those 12 prior buy signals occurred in the last 12 months alone. In other words, between 1967 and March 2009, this indicator gave just 10 buy signals -- an average of just one every 4.3 years. Since March 2009, in contrast, they have averaged once every four months or so.
The indicator in question comes from Ned Davis Research, the quantitative research firm. It generates a buy signal whenever the percentage of common stocks trading above their 50-day moving averages rises above 90%. Davis refers to such events as a "breadth thrust."
The recent buy signal, according to this indicator, occurred on April 5. The other buy signals over the last year occurred on May 4 and Sep. 16 of last year.
How has the stock market performed following past buy signals? Quite well, according to Davis' calculations
| Period after buy signal | Average return of S&P 500 | Worst experience | Best experience |
| Next month | 4.6% | 1.1% | 11.1% |
| Next quarter | 8.2% | 0.4% | 13.7% |
| Next 6 months | 13.1% | 4.9% | 24.3% |
| Next year | 19.7% | 11.6% | 33.9% |
It's worth noting, furthermore, that unlike many other trend-following indicators that have been biased upwards in recent years by the increasing number of interest-rate sensitive issues, Davis' calculations are based on a subset of stocks that eliminates closed-end funds, bond funds, exchange-traded funds, and the like.
Does this indicator mean you should throw caution to the winds? Of course not. As Davis points out to his clients, "one should never say 'never' regarding the stock market."
[via playtennis @ chucks_angels]Sunday, April 18, 2010
value traps
To be a great investor, you need to not only invest in great opportunities, but also avoid terrible ones. Here are some value traps you need to learn to recognize:
The quarter-life crisis: Beware the dominant company whose once- sky-high growth has stalled. Its price-to-earnings (P/E) ratio may be just half of its five-year average, and its earnings may have doubled over the past years, but that doesn't mean it will return to former lofty levels. It may have dug itself into a hole by expanding too quickly and paying too much for acquisitions and stock buybacks. Technology may have evolved and competitors may have emerged, stealing some of its thunder (and profits).
The soaring cyclical: Cyclical companies such as semiconductor makers and oilfield services companies, whose fortunes rise and fall with the economy, have counter-intuitive valuations. They look cheapest when they've reached their priciest, and vice versa. A time of high profits means a time of low profits is ahead. Consider these when their P/Es are rising, not shrinking.
The small-cap Methuselah: Here you have century-old small-caps you've never heard of that occasionally grow at rapid rates for a few years. When this happens, Wall Street analysts sometimes expect the growth to continue. But you won't find long-run compounding machines among small-caps. Companies with long histories of creating shareholder value become mid-cap or large-cap companies.
The rule taker: These companies don't have make-or-break rules - they just take them. Their business is standing on the tracks as a technological freight train is about to blow through. Save for a Hail Mary or two, rule-takers are out of options. Examples would be video rental companies in a new age of digital content distribution.
Instead of considering value traps, seek great, simple-to- understand businesses at good prices.
The quarter-life crisis: Beware the dominant company whose once- sky-high growth has stalled. Its price-to-earnings (P/E) ratio may be just half of its five-year average, and its earnings may have doubled over the past years, but that doesn't mean it will return to former lofty levels. It may have dug itself into a hole by expanding too quickly and paying too much for acquisitions and stock buybacks. Technology may have evolved and competitors may have emerged, stealing some of its thunder (and profits).
The soaring cyclical: Cyclical companies such as semiconductor makers and oilfield services companies, whose fortunes rise and fall with the economy, have counter-intuitive valuations. They look cheapest when they've reached their priciest, and vice versa. A time of high profits means a time of low profits is ahead. Consider these when their P/Es are rising, not shrinking.
The small-cap Methuselah: Here you have century-old small-caps you've never heard of that occasionally grow at rapid rates for a few years. When this happens, Wall Street analysts sometimes expect the growth to continue. But you won't find long-run compounding machines among small-caps. Companies with long histories of creating shareholder value become mid-cap or large-cap companies.
The rule taker: These companies don't have make-or-break rules - they just take them. Their business is standing on the tracks as a technological freight train is about to blow through. Save for a Hail Mary or two, rule-takers are out of options. Examples would be video rental companies in a new age of digital content distribution.
Instead of considering value traps, seek great, simple-to- understand businesses at good prices.
Friday, April 16, 2010
SEC accuses Goldman Sachs of civil fraud
One day after watching on CNBC some of Enron: The Smartest Guys in the Room comes this..
The government has accused Goldman Sachs & Co. of defrauding investors by failing to disclose conflicts of interest in mortgage investments it sold as the housing market was faltering.
The Securities and Exchange Commission said in a civil complaint Friday that Goldman failed to disclose that one of its clients helped create — and then bet against — subprime mortgage securities that Goldman sold to investors.
Goldman Sachs denied the allegations. In a statement, it called the SEC's charges "completely unfounded in law and fact" and said it will contest them.
Goldman Sachs shares fell more than 13 percent after the SEC announcement, which also caused shares of other financial companies to sink. The Dow Jones industrial average fell more than 140 points in midday trading.
[Not that I'm equating Goldman Sachs with Enron or anything..]
The government has accused Goldman Sachs & Co. of defrauding investors by failing to disclose conflicts of interest in mortgage investments it sold as the housing market was faltering.
The Securities and Exchange Commission said in a civil complaint Friday that Goldman failed to disclose that one of its clients helped create — and then bet against — subprime mortgage securities that Goldman sold to investors.
Goldman Sachs denied the allegations. In a statement, it called the SEC's charges "completely unfounded in law and fact" and said it will contest them.
Goldman Sachs shares fell more than 13 percent after the SEC announcement, which also caused shares of other financial companies to sink. The Dow Jones industrial average fell more than 140 points in midday trading.
[Not that I'm equating Goldman Sachs with Enron or anything..]
Tuesday, April 13, 2010
T. Rowe Price
Buying obscure or out-of-favor growth stocks is a very reliable recipe for making money in the market. This is an idea Thomas Rowe Price (1898-1983) — the founder of Baltimore-based T. Rowe Price, the firm — hatched back in the 1930s.
Price was a capable hand. He was a growth investor, but he was no fool — he bought growth stocks only when they were cheap. He knew price paid was the important consideration.
Twice in his career, Price closed his fund because he thought the market was too expensive, based on his inability to find cheap growth stocks. Once he closed it from October 1967-June 1970. And the other time was from March 1972-September 1974. During both periods, the market crashed.
Keep in mind that when he closed these funds, he was getting more than $1 million a day in new money from investors wanting to get in the market. Yet when he reopened his fund near the market bottoms — when things were cheap — investor interest was minimal. So there you go. Some things never change. Plus, I think few fund managers today would have the guts to close their fund when so much money — the source of their fees — was coming in.
Price’s idea was very simple on the surface. He thought the best way for an investor to make money in stocks was to buy growth — and then hang on for the long haul. He defined a growth stock this way: “Long-term earnings growth, reaching a new high level per share at the peak of each succeeding major business cycle and which gives indications of reaching new high earnings at the peak of future business cycles.” Note, by Price’s definition, you could own cyclical stocks, which many growth investors these days shun illogically.
Where Price turned Wall Street on its head was in what he thought was the least risky time to own such stocks. Price thought the best and least risky time to own a growth stock was during the early stages of growth.
Most people think that larger, more mature companies are less risky than younger, faster-growing ones. Not so for Price, who looked at companies as following a life cycle, like people do. There was growth, maturity and, finally, decadence. Here is Price in his own words, from a 1939 pamphlet:
“Insurance companies know that a greater risk is involved in insuring the life of a man 50 years old than a man 25, and that a much greater risk is involved in insuring a man of 75 than one of 50. They know, in other words, that risk increases as a man reaches maturity and starts to decline…
“In very much the same way, common sense tells us that an investment in a business affords great gain possibilities and involves less risk of loss while the long-term, or secular, earnings trend is still growing than after it has reached maturity and starts to decline… The risk factor increases when maturity is reached and decadence begins…”
Price went on to show that investing his way during the Great Depression would’ve produced a 67% gain, whereas the rest of the market lost money. In the 1930s, people focused on current dividends, and that meant they were reluctant to invest in a growth stock (which typically pays no dividend). Price thought that was a mistake, as I do. “High current income,” he wrote, “is obtained at the sacrifice of future income…”
In his day, Price was a force of nature. He was known as “Mr. Price” to nearly everyone. He was passionate about investing and still came to the office at the age of 83, rising at 5 a.m. every day. If you want to read more about Price, I would recommend John Train’s The Money Masters, which includes a chapter on Price, along with chapters on many other great investors.
In his day, Price was a force of nature. He was known as “Mr. Price” to nearly everyone. He was passionate about investing and still came to the office at the age of 83, rising at 5 a.m. every day. If you want to read more about Price, I would recommend John Train’s The Money Masters, which includes a chapter on Price, along with chapters on many other great investors.
Sincerely,
Chris Mayer
Penny Sleuth
*** [T. Rowe Price Report, Summer 2012]
Forbes magazine called him the “Sage of Baltimore.” Barron’s described his career as the “triumph of a visionary.” Author John Train devoted a chapter to him in his book profiling a dozen “money masters” of the 20th century.
Ironically, Thomas Rowe Price, Jr., who died in 1983, never studied economics or finance. Nor did he claim unusual insights that were unfathomable to the average investor. To identify fertile fields, he once said, required only “what my grandmother called gumption, my father called horse sense, and most people call common sense.”
And, perhaps because he was a very private person, he had little interaction with Wall Street.
Thomas Rowe Price, Jr.’s successful career was molded by the foresight to anticipate fundamental changes in economic trends, the patience to pursue long-term investment strategies, and the independence and self-confidence to take stands that often put him at odds with conventional wisdom.
“He had the courage to stand by his convictions, even when everybody else disagreed with him,” recalled Charles W. Shaeffer, a colleague who joined Mr. Price when the firm was founded 75 years ago.
“He was never frightened of standing alone when the crowd was going the other way,” Thomas Rowe Price III, his son, said. “In fact, he loved it. He would go the other way sometimes out of sheer obstinacy.”
This frequently required staunch investment fortitude as well as foresight, but Mr. Price usually remained unshakable in his beliefs. His growth stock approach to investing, developed in the 1930s, contradicted the conventional view of stocks as cyclical investments.
“He was truly an independent thinker,” says David Testa, former vice chairman and chief investment officer of the firm. “His idea of looking at growth of the income statement in the middle of the Depression was unique. To have the guts to try and buy companies because they were going to grow in the mid-1930s was
really quite something.”
Jack Laporte, a veteran portfolio manager with the firm, adds, “A lot of people don’t realize how revolutionary many of his thoughts were. In the early 1950s, investors in general thought equities were so risky that they demanded that stocks yield as much or more than bonds. Mr. Price said investors should really focus on growth in dividends and earnings and that was the foundation of his growth stock theory of investing and the Growth Stock Fund.”
Price was a capable hand. He was a growth investor, but he was no fool — he bought growth stocks only when they were cheap. He knew price paid was the important consideration.
Twice in his career, Price closed his fund because he thought the market was too expensive, based on his inability to find cheap growth stocks. Once he closed it from October 1967-June 1970. And the other time was from March 1972-September 1974. During both periods, the market crashed.
Keep in mind that when he closed these funds, he was getting more than $1 million a day in new money from investors wanting to get in the market. Yet when he reopened his fund near the market bottoms — when things were cheap — investor interest was minimal. So there you go. Some things never change. Plus, I think few fund managers today would have the guts to close their fund when so much money — the source of their fees — was coming in.
Price’s idea was very simple on the surface. He thought the best way for an investor to make money in stocks was to buy growth — and then hang on for the long haul. He defined a growth stock this way: “Long-term earnings growth, reaching a new high level per share at the peak of each succeeding major business cycle and which gives indications of reaching new high earnings at the peak of future business cycles.” Note, by Price’s definition, you could own cyclical stocks, which many growth investors these days shun illogically.
Where Price turned Wall Street on its head was in what he thought was the least risky time to own such stocks. Price thought the best and least risky time to own a growth stock was during the early stages of growth.
Most people think that larger, more mature companies are less risky than younger, faster-growing ones. Not so for Price, who looked at companies as following a life cycle, like people do. There was growth, maturity and, finally, decadence. Here is Price in his own words, from a 1939 pamphlet:
“Insurance companies know that a greater risk is involved in insuring the life of a man 50 years old than a man 25, and that a much greater risk is involved in insuring a man of 75 than one of 50. They know, in other words, that risk increases as a man reaches maturity and starts to decline…
“In very much the same way, common sense tells us that an investment in a business affords great gain possibilities and involves less risk of loss while the long-term, or secular, earnings trend is still growing than after it has reached maturity and starts to decline… The risk factor increases when maturity is reached and decadence begins…”
Price went on to show that investing his way during the Great Depression would’ve produced a 67% gain, whereas the rest of the market lost money. In the 1930s, people focused on current dividends, and that meant they were reluctant to invest in a growth stock (which typically pays no dividend). Price thought that was a mistake, as I do. “High current income,” he wrote, “is obtained at the sacrifice of future income…”
In his day, Price was a force of nature. He was known as “Mr. Price” to nearly everyone. He was passionate about investing and still came to the office at the age of 83, rising at 5 a.m. every day. If you want to read more about Price, I would recommend John Train’s The Money Masters, which includes a chapter on Price, along with chapters on many other great investors.
In his day, Price was a force of nature. He was known as “Mr. Price” to nearly everyone. He was passionate about investing and still came to the office at the age of 83, rising at 5 a.m. every day. If you want to read more about Price, I would recommend John Train’s The Money Masters, which includes a chapter on Price, along with chapters on many other great investors.
Sincerely,
Chris Mayer
Penny Sleuth
*** [T. Rowe Price Report, Summer 2012]
Forbes magazine called him the “Sage of Baltimore.” Barron’s described his career as the “triumph of a visionary.” Author John Train devoted a chapter to him in his book profiling a dozen “money masters” of the 20th century.
Ironically, Thomas Rowe Price, Jr., who died in 1983, never studied economics or finance. Nor did he claim unusual insights that were unfathomable to the average investor. To identify fertile fields, he once said, required only “what my grandmother called gumption, my father called horse sense, and most people call common sense.”
And, perhaps because he was a very private person, he had little interaction with Wall Street.
Thomas Rowe Price, Jr.’s successful career was molded by the foresight to anticipate fundamental changes in economic trends, the patience to pursue long-term investment strategies, and the independence and self-confidence to take stands that often put him at odds with conventional wisdom.
“He had the courage to stand by his convictions, even when everybody else disagreed with him,” recalled Charles W. Shaeffer, a colleague who joined Mr. Price when the firm was founded 75 years ago.
“He was never frightened of standing alone when the crowd was going the other way,” Thomas Rowe Price III, his son, said. “In fact, he loved it. He would go the other way sometimes out of sheer obstinacy.”
This frequently required staunch investment fortitude as well as foresight, but Mr. Price usually remained unshakable in his beliefs. His growth stock approach to investing, developed in the 1930s, contradicted the conventional view of stocks as cyclical investments.
“He was truly an independent thinker,” says David Testa, former vice chairman and chief investment officer of the firm. “His idea of looking at growth of the income statement in the middle of the Depression was unique. To have the guts to try and buy companies because they were going to grow in the mid-1930s was
really quite something.”
Jack Laporte, a veteran portfolio manager with the firm, adds, “A lot of people don’t realize how revolutionary many of his thoughts were. In the early 1950s, investors in general thought equities were so risky that they demanded that stocks yield as much or more than bonds. Mr. Price said investors should really focus on growth in dividends and earnings and that was the foundation of his growth stock theory of investing and the Growth Stock Fund.”
Friday, April 02, 2010
concentrated investing
concentrated investors are typically successful. Among brokerage-account holders with at least $100,000, those with just a handful of holdings tend to buy stocks that go on to beat the stocks they sell by three percentage points a year, according to a new study scheduled for publication this fall in the Journal of Financial and Quantitative Analysis. For account holders with lots of stocks, the average record is grim: The stocks sold go on to outperform the ones bought by 1.8 percentage points a year. The second thing to keep in mind is that no one criticizes the small-business owner for staking too much capital in a single company. Your concentrated portfolio makes you a business owner with stakes in five to 10 companies. And you have the advantage of picking the best ones from thousands that are already successful.
[on the other hand]
[on the other hand]
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.