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.
Tuesday, June 29, 2010
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.
Monday, December 28, 2009
Positive indications in Asia
Shares in Asia rose on positive indications about recovery after Japan's government said their economy will expand for the first time in three years and industrial production rose at the fastest pace in six months in November, while China upwardly revised prior growth figures. Japan's Nikkei 225 Index rose 1.3% after it was reported that industrial production rose 2.6% in November versus the 2.5% estimate, despite a bigger drop in large retailer sales than expected at -9.6%. The Japanese government said on Dec. 25 that its 7.2 trillion yen ($78.8 billion) stimulus package unveiled earlier this month would probably boost GDP by 0.7% in 2010 and create about 200,000 jobs.
In China, the estimate of 2008 GDP was upwardly adjusted to 9.6% from 9.0% and the government said this year's previously reported quarterly figures will also increase. Chinese Premier Wen Jiabao reiterated the desire to cool property prices, saying that "property prices have risen too quickly in some areas and we should use taxes and loan interest rates to stabilize them," while maintaining a "moderately loose" monetary policy and a "proactive" fiscal stance, saying it would be a mistake to withdraw stimulus too quickly. Wen added that China will "absolutely not yield" to calls to allow the yuan to appreciate, saying that "Keeping the yuan's value basically steady is our contribution to the international community at a time when the world's major currencies have been devalued." Wen also addressed bank lending, saying "it would be good if our bank lending was more balanced, better structured and not on such a large scale," but that the situation "has been improving in the second half of this year."
Despite the property comments, shares of Chinese property stocks rose, and the Shanghai Composite increased 1.5%. Prices of property were also on the mind of investors in Hong Kong, after the city's government sold two sites at prices below market expectations, and the Hang Seng Index was the only major equity benchmark in Asia to decline, falling 0.2%, while South Korea's Kospi Index increased 0.2% and the Australian market was closed. In equity news, China Mobile (CHL $45) erased early losses and gained 0.3% despite a report that the company's Vice Chairman was being investigated by the government in connection with an unspecified "serious disciplinary breach."
[Schwab Alerts]
In China, the estimate of 2008 GDP was upwardly adjusted to 9.6% from 9.0% and the government said this year's previously reported quarterly figures will also increase. Chinese Premier Wen Jiabao reiterated the desire to cool property prices, saying that "property prices have risen too quickly in some areas and we should use taxes and loan interest rates to stabilize them," while maintaining a "moderately loose" monetary policy and a "proactive" fiscal stance, saying it would be a mistake to withdraw stimulus too quickly. Wen added that China will "absolutely not yield" to calls to allow the yuan to appreciate, saying that "Keeping the yuan's value basically steady is our contribution to the international community at a time when the world's major currencies have been devalued." Wen also addressed bank lending, saying "it would be good if our bank lending was more balanced, better structured and not on such a large scale," but that the situation "has been improving in the second half of this year."
Despite the property comments, shares of Chinese property stocks rose, and the Shanghai Composite increased 1.5%. Prices of property were also on the mind of investors in Hong Kong, after the city's government sold two sites at prices below market expectations, and the Hang Seng Index was the only major equity benchmark in Asia to decline, falling 0.2%, while South Korea's Kospi Index increased 0.2% and the Australian market was closed. In equity news, China Mobile (CHL $45) erased early losses and gained 0.3% despite a report that the company's Vice Chairman was being investigated by the government in connection with an unspecified "serious disciplinary breach."
[Schwab Alerts]
Monday, December 21, 2009
the worst decade ever for stocks
The U.S. stock market is wrapping up what is likely to be its worst decade ever.
In nearly 200 years of recorded stock-market history, no calendar decade has seen such a dismal performance as the 2000s.
Investors would have been better off investing in pretty much anything else, from bonds to gold or even just stuffing money under a mattress. Since the end of 1999, stocks traded on the New York Stock Exchange have lost an average of 0.5% a year thanks to the twin bear markets this decade.
The period has provided a lesson for ordinary Americans who used stocks as their primary way of saving for retirement.
Journal Community
Vote: Are you better off today than 10 years ago?
Many investors were lured to the stock market by the bull market that began in the early 1980s and gained force through the 1990s. But coming out of the 1990s—when a 17.6% average annual gain made it the second-best decade in history behind the 1950s—stocks simply had gotten too expensive. Companies also pared dividends, cutting into investor returns. And in a time of financial panic like 2008, stocks were a terrible place to invest.
With two weeks to go in 2009, the declines since the end of 1999 make the last 10 years the worst calendar decade for stocks going back to the 1820s, when reliable stock market records begin, according to data compiled by Yale University finance professor William Goetzmann. He estimates it would take a 3.6% rise between now and year end for the decade to come in better than the 0.2% decline suffered by stocks during the Depression years of the 1930s.
In nearly 200 years of recorded stock-market history, no calendar decade has seen such a dismal performance as the 2000s.
Investors would have been better off investing in pretty much anything else, from bonds to gold or even just stuffing money under a mattress. Since the end of 1999, stocks traded on the New York Stock Exchange have lost an average of 0.5% a year thanks to the twin bear markets this decade.
The period has provided a lesson for ordinary Americans who used stocks as their primary way of saving for retirement.
Journal Community
Vote: Are you better off today than 10 years ago?
Many investors were lured to the stock market by the bull market that began in the early 1980s and gained force through the 1990s. But coming out of the 1990s—when a 17.6% average annual gain made it the second-best decade in history behind the 1950s—stocks simply had gotten too expensive. Companies also pared dividends, cutting into investor returns. And in a time of financial panic like 2008, stocks were a terrible place to invest.
With two weeks to go in 2009, the declines since the end of 1999 make the last 10 years the worst calendar decade for stocks going back to the 1820s, when reliable stock market records begin, according to data compiled by Yale University finance professor William Goetzmann. He estimates it would take a 3.6% rise between now and year end for the decade to come in better than the 0.2% decline suffered by stocks during the Depression years of the 1930s.
Friday, December 18, 2009
the man who saved the economy (according to Warren Buffett)
Over dinner at the amazing Piccolo Pete's, the Italian restaurant in a working class neighborhood that seems to set aside most of the restaurant just for him, he said the economy had really been in desperate shape last fall.
The man who saved it, he said, was Ken Lewis, beleaguered head of Bank of America (BAC, Fortune 500). By buying Merrill Lynch just as everything at Lehman was falling apart, he put some confidence back into the system and stopped -- or helped mightily to stop -- a "run on the bank" which would have laid waste all of Wall Street.
If Merrill had failed, said Buffett, it would have been followed swiftly by Morgan (MS, Fortune 500) and then by Goldman. By overpaying wildly for Merrill, Lewis essentially saved the nation from financial collapse.
Without that buy, commercial paper would have simply stopped dead and the banks' slender capital would have been swamped by debt as that commercial paper could not be rolled over.
The man who saved it, he said, was Ken Lewis, beleaguered head of Bank of America (BAC, Fortune 500). By buying Merrill Lynch just as everything at Lehman was falling apart, he put some confidence back into the system and stopped -- or helped mightily to stop -- a "run on the bank" which would have laid waste all of Wall Street.
If Merrill had failed, said Buffett, it would have been followed swiftly by Morgan (MS, Fortune 500) and then by Goldman. By overpaying wildly for Merrill, Lewis essentially saved the nation from financial collapse.
Without that buy, commercial paper would have simply stopped dead and the banks' slender capital would have been swamped by debt as that commercial paper could not be rolled over.
value investing and longevity
VALUE investing is about buying undervalued securities. It's about looking at parts of the market where nobody is looking. And selling out when everybody starts to get excited.
Value investors have deep convictions on what they think offers value. And to minimise the chances of them being wrong, they allow for a significant 'margin of safety' - that is, the securities they buy into have to be so undervalued that even if things get much worse, there is not much room for them to fall further.
Value investing requires patience. It requires independence of thought. And because value investors have such deep conviction that what they buy is trading at below market value, even if the general market were to plunge, they don't panic. In fact, they would see this as an opportunity to buy more.
As a result of all these factors, value investors are said to sleep better at night. And conceivably, they are not so highly strung. Their stress level would be lower than those who chase after the market and whose mood swings along with it.
Perhaps all this explains why some well-known value investors live much longer than the average person.
Don't believe me? Let's see.
Benjamin Graham, father of value investing and mentor of Warren Buffett, is the author of Security Analysis and The Intelligent Investor. In Security Analysis, he advocated a cautious approach to investing. In terms of picking stocks, he recommended defensive investment in stocks trading below their tangible book value as a safeguard against future adverse developments often encountered in the stock market. A professor at Columbia Business School, he lived until 82.
David Dodd, also a professor at Columbia Business School and co-author of Security Analysis, lived until 93.
John Templeton was noted for borrowing money from family and friends when he was 27, to buy 100 shares of each company trading at less than US$1 (US$15 in current dollar terms) a share in 1939. He made many times the money back in a four-year period. He became a billionaire by pioneering overseas investment funds in the US. He died last year at 95, after devoting many of his later years to philanthropy.
Philip Fisher, author of the still-popular Common Stocks and Uncommon Profits, believed in long-term investing, in buying great companies at good prices, and then thumbing his nose at the taxman as he held, and held, and held. His most famous investment was his purchase of Motorola, a company he bought in 1955 when it was a radio manufacturer, and held until his death in March 2004 at age 96.
Another Philip, Philip Carret, the founder of Pioneer Fund, was also a hero of Warren Buffett. In his book A Money Mind at Ninety, he said he inherited his 'money mind'. He died at the age of 101. David Tripple, former chief investment officer of Pioneer Group, said: 'In 101 years, I don't think he ever once got sucked up into a fad or frenzy.'
Now let's look at some of the great value investors who are still active today.
Warren Buffett needs no introduction. He is 79 this year, and is still deploying his billions, most recently a US$26 billion bet on Burlington Northern Santa Fe railroad. He described the purchase as an opportunity to buy a business that's going to be around for 100 or 200 years.
Charlie Munger, vice-chairman of Berkshire Hathaway, has exerted key influence on the success of Mr Buffett's enterprise over many decades. He is 85 this year.
Martin Whitman is founder and portfolio manager of Third Avenue Value Fund. He is a 'buy and hold' value investor. He buys stock in companies he thinks have strong finances, competent management and an understandable business. Also, the company's stock must be cheap. He generally sells an investment only when there has been a fundamental change in the business or capital structure of the company that significantly affects the investment's inherent value, or when he believes that the market value of an investment is over-priced relative to its intrinsic value. He is 85 this year.
Recently, the Financial Times interviewed two active investors who are well past 100. Irving Kahn is the oldest active money manager on Wall Street at 103. Mr Kahn says he ignores market gyrations and typically holds stocks for at least three years and up to 15. His firm, Kahn Brothers, compares its philosophy to tending an orchard with different types of fruits, some of which ripen more slowly than others. Mr Kahn incidentally was Mr Graham's first teaching assistant and helped him with Security Analysis. Like Mr Graham, Mr Kahn seeks unloved and obscure stocks, eschewing high fliers.
Roy Neuberger and the company he founded, Neuberger Berman, also subscribe to similar principles. Mr Neuberger retired at 99 and today, at 106, is still consulted regularly by his 68-year-old protege Marvin Schwartz. The latter credits Mr Neuberger with providing appropriate perspective during recent hard times. 'In almost each and every instance, he advised us to buy in what would be a passing negative period,' Mr Schwartz was quoted by FT as saying.
The website Monevator also recently explored whether being a great investor also means you'll live longer. The article postulated why some of them lived to such a ripe old age. Among the reasons given were:
* Job satisfaction - People who are happier and lead productive lives have been shown to live healthier, longer lives. There's no doubt all these investors loved investing.
* Active mentally - Lots of old people in Japan now do brain training to ward off Alzhiemer's disease and other degenerative brain ailments. What could be more testing than trying the impossible - beating the market through stock picking?
* Eustress - the flipside of distress, eustress is a form of positive stress, associated with achieving in life.
* Intelligence, good upbringing and better health care - all the investors enjoyed these.
My take is that their longevity stems from their love of life in general. In a tribute to Philip Carret, the Outstanding Investors Digest wrote: 'Although he died at the age of 101, which many would consider to be a ripe old age, he was as young at heart, vital and as active to the last as anyone we know.'
[via brknews]
Value investors have deep convictions on what they think offers value. And to minimise the chances of them being wrong, they allow for a significant 'margin of safety' - that is, the securities they buy into have to be so undervalued that even if things get much worse, there is not much room for them to fall further.
Value investing requires patience. It requires independence of thought. And because value investors have such deep conviction that what they buy is trading at below market value, even if the general market were to plunge, they don't panic. In fact, they would see this as an opportunity to buy more.
As a result of all these factors, value investors are said to sleep better at night. And conceivably, they are not so highly strung. Their stress level would be lower than those who chase after the market and whose mood swings along with it.
Perhaps all this explains why some well-known value investors live much longer than the average person.
Don't believe me? Let's see.
Benjamin Graham, father of value investing and mentor of Warren Buffett, is the author of Security Analysis and The Intelligent Investor. In Security Analysis, he advocated a cautious approach to investing. In terms of picking stocks, he recommended defensive investment in stocks trading below their tangible book value as a safeguard against future adverse developments often encountered in the stock market. A professor at Columbia Business School, he lived until 82.
David Dodd, also a professor at Columbia Business School and co-author of Security Analysis, lived until 93.
John Templeton was noted for borrowing money from family and friends when he was 27, to buy 100 shares of each company trading at less than US$1 (US$15 in current dollar terms) a share in 1939. He made many times the money back in a four-year period. He became a billionaire by pioneering overseas investment funds in the US. He died last year at 95, after devoting many of his later years to philanthropy.
Philip Fisher, author of the still-popular Common Stocks and Uncommon Profits, believed in long-term investing, in buying great companies at good prices, and then thumbing his nose at the taxman as he held, and held, and held. His most famous investment was his purchase of Motorola, a company he bought in 1955 when it was a radio manufacturer, and held until his death in March 2004 at age 96.
Another Philip, Philip Carret, the founder of Pioneer Fund, was also a hero of Warren Buffett. In his book A Money Mind at Ninety, he said he inherited his 'money mind'. He died at the age of 101. David Tripple, former chief investment officer of Pioneer Group, said: 'In 101 years, I don't think he ever once got sucked up into a fad or frenzy.'
Now let's look at some of the great value investors who are still active today.
Warren Buffett needs no introduction. He is 79 this year, and is still deploying his billions, most recently a US$26 billion bet on Burlington Northern Santa Fe railroad. He described the purchase as an opportunity to buy a business that's going to be around for 100 or 200 years.
Charlie Munger, vice-chairman of Berkshire Hathaway, has exerted key influence on the success of Mr Buffett's enterprise over many decades. He is 85 this year.
Martin Whitman is founder and portfolio manager of Third Avenue Value Fund. He is a 'buy and hold' value investor. He buys stock in companies he thinks have strong finances, competent management and an understandable business. Also, the company's stock must be cheap. He generally sells an investment only when there has been a fundamental change in the business or capital structure of the company that significantly affects the investment's inherent value, or when he believes that the market value of an investment is over-priced relative to its intrinsic value. He is 85 this year.
Recently, the Financial Times interviewed two active investors who are well past 100. Irving Kahn is the oldest active money manager on Wall Street at 103. Mr Kahn says he ignores market gyrations and typically holds stocks for at least three years and up to 15. His firm, Kahn Brothers, compares its philosophy to tending an orchard with different types of fruits, some of which ripen more slowly than others. Mr Kahn incidentally was Mr Graham's first teaching assistant and helped him with Security Analysis. Like Mr Graham, Mr Kahn seeks unloved and obscure stocks, eschewing high fliers.
Roy Neuberger and the company he founded, Neuberger Berman, also subscribe to similar principles. Mr Neuberger retired at 99 and today, at 106, is still consulted regularly by his 68-year-old protege Marvin Schwartz. The latter credits Mr Neuberger with providing appropriate perspective during recent hard times. 'In almost each and every instance, he advised us to buy in what would be a passing negative period,' Mr Schwartz was quoted by FT as saying.
The website Monevator also recently explored whether being a great investor also means you'll live longer. The article postulated why some of them lived to such a ripe old age. Among the reasons given were:
* Job satisfaction - People who are happier and lead productive lives have been shown to live healthier, longer lives. There's no doubt all these investors loved investing.
* Active mentally - Lots of old people in Japan now do brain training to ward off Alzhiemer's disease and other degenerative brain ailments. What could be more testing than trying the impossible - beating the market through stock picking?
* Eustress - the flipside of distress, eustress is a form of positive stress, associated with achieving in life.
* Intelligence, good upbringing and better health care - all the investors enjoyed these.
My take is that their longevity stems from their love of life in general. In a tribute to Philip Carret, the Outstanding Investors Digest wrote: 'Although he died at the age of 101, which many would consider to be a ripe old age, he was as young at heart, vital and as active to the last as anyone we know.'
[via brknews]
Tuesday, December 08, 2009
Value Line's Samuel Eisenstadt fired
For 63 years, Samuel Eisenstadt was probably Value Line Inc.’s most valued employee. The statistician created an investment strategy that proved successful for decades and was endorsed by none other than Warren Buffett. But today he embarks on something new — unemployment.
Late last Friday afternoon, the firm’s new chief executive, Howard Brecher, called Mr. Eisenstadt and told him that his services were “no longer needed” and he was retiring, effective immediately, according to Mr. Eisenstadt. Yet the 87-year-old, who helped drive the Nazis out of France and Belgium as a member of the U.S Army’s 8th Armored Division, was in no mood to be shoved aside.
“I refuse to accept the explanation that I’m retiring,” Mr. Eisenstadt said. “I’m not retiring, and I don’t plan to retire. My mind is still sharp and wrapped up in my work. This is a very sad ending, and it really hurts.”
[via veryearly1]
Late last Friday afternoon, the firm’s new chief executive, Howard Brecher, called Mr. Eisenstadt and told him that his services were “no longer needed” and he was retiring, effective immediately, according to Mr. Eisenstadt. Yet the 87-year-old, who helped drive the Nazis out of France and Belgium as a member of the U.S Army’s 8th Armored Division, was in no mood to be shoved aside.
“I refuse to accept the explanation that I’m retiring,” Mr. Eisenstadt said. “I’m not retiring, and I don’t plan to retire. My mind is still sharp and wrapped up in my work. This is a very sad ending, and it really hurts.”
[via veryearly1]
Friday, November 27, 2009
Jim Rogers on gold and Geithner
Maria Bartiromo interviews Jimmy Rogers
Well, I own gold and I have for a while. How high can it go? I fully expect it to be over a couple thousand dollars an ounce sometime in the next decade—I didn't say the next month, I didn't say the next year, I said the next decade—because paper money around the world is very suspect. But right now everybody's bullish on it, so I don't like to buy things when that's happening. But I'm not selling under any circumstances.
Tim Geithner has been under attack lately. How's he doing?
Listen, I have been a critic for years. Geithner should never have been appointed to anything. He's been wrong about just about everything for 15 years.
Do you think he'll lose his job?
Of course he's going to lose his job, because as Mr. Obama realizes that Geithner doesn't know what he's doing, he's going to look for somebody else because he doesn't want to take the heat himself. So he's going to look to blame somebody, and the obvious person is Geithner.
[via maverick@investwise]
Well, I own gold and I have for a while. How high can it go? I fully expect it to be over a couple thousand dollars an ounce sometime in the next decade—I didn't say the next month, I didn't say the next year, I said the next decade—because paper money around the world is very suspect. But right now everybody's bullish on it, so I don't like to buy things when that's happening. But I'm not selling under any circumstances.
Tim Geithner has been under attack lately. How's he doing?
Listen, I have been a critic for years. Geithner should never have been appointed to anything. He's been wrong about just about everything for 15 years.
Do you think he'll lose his job?
Of course he's going to lose his job, because as Mr. Obama realizes that Geithner doesn't know what he's doing, he's going to look for somebody else because he doesn't want to take the heat himself. So he's going to look to blame somebody, and the obvious person is Geithner.
[via maverick@investwise]
Tuesday, November 24, 2009
existing home sales surge
Existing-home sales surged 10.1% month-over-month (m/m) to an annual rate of 6.10 million units in October. That was significantly better than expected as economists had only forecast a 2.3% gain to 5.70 million. At the same time, last month's data was revised lower, with September data now showing an 8.8% increase to 5.54 million units. Even the National Association of Realtors was surprised at the size of the gain with NAR's chief economist reporting "Many buyers have been rushing to beat the deadline for the first-time buyer tax credit that was scheduled to expire at the end of this month, and similarly robust sales may be occurring in November." Similarly, the NAR warned "With such a sale spike, a measurable decline should be anticipated in December and early next year before another surge in spring and early summer."
The report showed that strength was broad-based, with single-family home sales up 9.7% and multi-family sales rising 13.2%. The data also showed every region save one posting a double-digit gain in sales. The 1.6% increase in the West was the lone exception. Elsewhere in the report, distressed properties constituted 30% of sales nationwide during October, which weighed down the median existing-home price to $173,100 - 7.1% lower year-over-year (y/y). That decline in prices has driven affordability levels to all-time highs, with data back to the 1970s. The price-to-income ratio has also fallen below its historic trend line, which the NAR said will contribute to prices bottoming and even rising next year. Even inventory levels are beginning to look bullish. "In fact, low-end inventory has become very tight in many areas and in some cases buyers are becoming more aggressive," the NAR reported. Total housing inventory now represents a 7.0 month supply, the lowest level in over two-and-a-half years.
The stabilization of the housing market is one factor that could get the US consumer back on its feet sooner than expected. As Schwab's Director of Sector and Market Analysis, Brad Sorensen, CFA, points out in his Schwab Sector Views: Scaling Back, there are multiple reasons to be concerned about the health of the American consumer, but there are also reasons to be optimistic. Among the negative factors are an unemployment rate which is likely to move higher and the need for consumers to repair their personal balance sheets. Tighter credit conditions will also likely reduce consumers' ability to spend. However, Americans have a propensity to consume and have defied predictions of their shopping demise many times before. In addition, at the end of a year when American consumers have shown restraint in spending, it is not too difficult to imagine some pent-up demand being released during this time of the year-resulting in the potential for upside surprises. In the end, after taking into account all of these factors as well as the strong rally in cyclical areas of the market since March and resulting valuation of stocks in the sector, Brad feels a Marketperform rating of consumer stocks is appropriate. Read more at www.schwab.com/marketinsight.
[via Schwab Alerts]
The report showed that strength was broad-based, with single-family home sales up 9.7% and multi-family sales rising 13.2%. The data also showed every region save one posting a double-digit gain in sales. The 1.6% increase in the West was the lone exception. Elsewhere in the report, distressed properties constituted 30% of sales nationwide during October, which weighed down the median existing-home price to $173,100 - 7.1% lower year-over-year (y/y). That decline in prices has driven affordability levels to all-time highs, with data back to the 1970s. The price-to-income ratio has also fallen below its historic trend line, which the NAR said will contribute to prices bottoming and even rising next year. Even inventory levels are beginning to look bullish. "In fact, low-end inventory has become very tight in many areas and in some cases buyers are becoming more aggressive," the NAR reported. Total housing inventory now represents a 7.0 month supply, the lowest level in over two-and-a-half years.
The stabilization of the housing market is one factor that could get the US consumer back on its feet sooner than expected. As Schwab's Director of Sector and Market Analysis, Brad Sorensen, CFA, points out in his Schwab Sector Views: Scaling Back, there are multiple reasons to be concerned about the health of the American consumer, but there are also reasons to be optimistic. Among the negative factors are an unemployment rate which is likely to move higher and the need for consumers to repair their personal balance sheets. Tighter credit conditions will also likely reduce consumers' ability to spend. However, Americans have a propensity to consume and have defied predictions of their shopping demise many times before. In addition, at the end of a year when American consumers have shown restraint in spending, it is not too difficult to imagine some pent-up demand being released during this time of the year-resulting in the potential for upside surprises. In the end, after taking into account all of these factors as well as the strong rally in cyclical areas of the market since March and resulting valuation of stocks in the sector, Brad feels a Marketperform rating of consumer stocks is appropriate. Read more at www.schwab.com/marketinsight.
[via Schwab Alerts]
China a paper dragon?
The conventional wisdom in Washington and in most of the rest of the world is that the roaring Chinese economy is going to pull the global economy out of recession and back into growth. It’s China’s turn, the theory goes, as American consumers — who propelled the last global boom with their borrowing and spending ways — have begun to tighten their belts and increase savings rates.
The Chinese, with their unbridled capitalistic expansion propelled by a system they still refer to as “socialism with Chinese characteristics,” are still thriving, though, with annual gross domestic product growth of 8.9 percent in the third quarter and a domestic consumer market just starting to flex its enormous muscles.
But there’s a growing group of market professionals who see a different picture altogether. These self-styled China bears take the less popular view: that the much-vaunted Chinese economic miracle is nothing but a paper dragon. In fact, they argue that the Chinese have dangerously overheated their economy, building malls, luxury stores and infrastructure for which there is almost no demand, and that the entire system is teetering toward collapse.
The China bears could be dismissed as a bunch of cranks and grumps except for one member of the group: hedge fund investor Jim Chanos.
Chanos, a billionaire, is the founder of the investment firm Kynikos Associates and a famous short seller — an investor who scrutinizes companies looking for hidden flaws and then bets against those firms in the market.
Chanos and the other bears point to several key pieces of evidence that China is heading for a crash.
First, they point to the enormous Chinese economic stimulus effort — with the government spending $900 billion to prop up a $4.3 trillion economy. “Yet China’s economy, for all the stimulus it has received in 11 months, is underperforming,” Gordon Chang, author of “The Coming Collapse of China,” wrote in Forbes at the end of October. “More important, it is unlikely that [third-quarter] expansion was anywhere near the claimed 8.9 percent.”
Chang argues that inconsistencies in Chinese official statistics — like the surging numbers for car sales but flat statistics for gasoline consumption — indicate that the Chinese are simply cooking their books. He speculates that Chinese state-run companies are buying fleets of cars and simply storing them in giant parking lots in order to generate apparent growth.
And the bears also keep a close eye on anecdotal reports from the ground level in China, like a recent posting on a blog called The Peking Duck about shopping at Beijing’s “stunningly dysfunctional, catastrophic mall, called The Place.”
“I was shocked at what I saw,” the blogger wrote. “Fifty percent of the eateries in the basement were boarded up. The cheap food court, too, was gone, covered up with ugly blue boarding, making the basement especially grim and dreary. ... There is simply too much stuff, too many stores and no buyers.”
[via maverick@investwise]
The Chinese, with their unbridled capitalistic expansion propelled by a system they still refer to as “socialism with Chinese characteristics,” are still thriving, though, with annual gross domestic product growth of 8.9 percent in the third quarter and a domestic consumer market just starting to flex its enormous muscles.
But there’s a growing group of market professionals who see a different picture altogether. These self-styled China bears take the less popular view: that the much-vaunted Chinese economic miracle is nothing but a paper dragon. In fact, they argue that the Chinese have dangerously overheated their economy, building malls, luxury stores and infrastructure for which there is almost no demand, and that the entire system is teetering toward collapse.
The China bears could be dismissed as a bunch of cranks and grumps except for one member of the group: hedge fund investor Jim Chanos.
Chanos, a billionaire, is the founder of the investment firm Kynikos Associates and a famous short seller — an investor who scrutinizes companies looking for hidden flaws and then bets against those firms in the market.
Chanos and the other bears point to several key pieces of evidence that China is heading for a crash.
First, they point to the enormous Chinese economic stimulus effort — with the government spending $900 billion to prop up a $4.3 trillion economy. “Yet China’s economy, for all the stimulus it has received in 11 months, is underperforming,” Gordon Chang, author of “The Coming Collapse of China,” wrote in Forbes at the end of October. “More important, it is unlikely that [third-quarter] expansion was anywhere near the claimed 8.9 percent.”
Chang argues that inconsistencies in Chinese official statistics — like the surging numbers for car sales but flat statistics for gasoline consumption — indicate that the Chinese are simply cooking their books. He speculates that Chinese state-run companies are buying fleets of cars and simply storing them in giant parking lots in order to generate apparent growth.
And the bears also keep a close eye on anecdotal reports from the ground level in China, like a recent posting on a blog called The Peking Duck about shopping at Beijing’s “stunningly dysfunctional, catastrophic mall, called The Place.”
“I was shocked at what I saw,” the blogger wrote. “Fifty percent of the eateries in the basement were boarded up. The cheap food court, too, was gone, covered up with ugly blue boarding, making the basement especially grim and dreary. ... There is simply too much stuff, too many stores and no buyers.”
[via maverick@investwise]
Saturday, November 21, 2009
unemployment rate hits double digits
The unemployment rate has hit double digits for the first time since 1983 — and is likely to go higher. The 10.2 percent jobless rate for October shows how weak the economy remains even though it is growing. The rising jobless rate could threaten the recovery if it saps consumers' confidence and makes them more cautious about spending as the holiday season approaches.
The October unemployment rate — reflecting nearly 16 million jobless people — jumped from 9.8 percent in September, the Labor Department said Friday. The job losses occurred across most industries, from manufacturing and construction to retail and financial.
Economists say the unemployment rate could surpass 10.5 percent next year because employers are reluctant to hire.
President Barack Obama called the new jobs report another illustration of why much more work is needed to spur business creation and consumer spending. Noting legislation he's signing to provide additional unemployment benefits for laid-off workers, Obama said, "I will not rest until all Americans who want work can find work."
The October unemployment rate — reflecting nearly 16 million jobless people — jumped from 9.8 percent in September, the Labor Department said Friday. The job losses occurred across most industries, from manufacturing and construction to retail and financial.
Economists say the unemployment rate could surpass 10.5 percent next year because employers are reluctant to hire.
President Barack Obama called the new jobs report another illustration of why much more work is needed to spur business creation and consumer spending. Noting legislation he's signing to provide additional unemployment benefits for laid-off workers, Obama said, "I will not rest until all Americans who want work can find work."
Friday, November 20, 2009
back at 1100
The S&P 500 is back at 1100 more than 11 years after it first reached that level.
The biggest winners in that time frame were RIMM and Apple. The biggest losers were AIG and Eastman Kodak.
[via Free Speech]
The biggest winners in that time frame were RIMM and Apple. The biggest losers were AIG and Eastman Kodak.
[via Free Speech]
Saturday, November 14, 2009
the recession is over (?)
The United States has emerged from the longest economic contraction since World War II.
The nation’s gross domestic product expanded at an annual rate of 3.5 percent in the quarter that ended in September, matching its average growth rate of the last 80 years, according to the Commerce Department.
But government programs to encourage consumer spending on things like cars and houses are expiring, and employers remain reluctant to hire more workers, suggesting the recovery may not last, economists say.
The nation’s gross domestic product expanded at an annual rate of 3.5 percent in the quarter that ended in September, matching its average growth rate of the last 80 years, according to the Commerce Department.
But government programs to encourage consumer spending on things like cars and houses are expiring, and employers remain reluctant to hire more workers, suggesting the recovery may not last, economists say.
Tuesday, October 27, 2009
Zacks on growth and value
* Did you know that stocks with 'just' double-digit growth rates typically outperform stocks with triple-digit growth rates?
* Did you also know that stocks with crazy high growth rates test almost as poorly as those with the lowest growth rates?
Did your last loser have a spectacular growth rate?
If so, and it still got crushed, would you have picked it if you knew that stocks with the highest growth rates have spotty track records?
It seems logical to think that companies with the highest growth rates would do the best. But it doesn't always turn out to be the case.
One explanation for this is that sky high growth rates are unsustainable. And the moment a more normal (albeit still good) growth rate emerges, the stock gets a dose of reality as well.
Instead, I have found that comparing a stock to the median growth rate for its industry is the best way to find solid outperformers with a lesser chance to disappoint.
* Did you know that the top performing stocks each year will usually see their P/E ratios more than double from where it started?
* Did you also know that, historically, most of the best performers began their runs with P/Es over the 'magic' number of a P/E ratio of 20?
* And did you know that an even greater majority of the top performers finished with P/E ratios of well over 20?
If you only confine yourself to stocks with P/Es under 20, you'll be consistently keeping yourself from getting in on some of the best performing stocks each year.
Moreover, knowing that the top performers will typically see their P/E ratios rise (more than 100%) during their move, you'd be getting out the moment those stocks get above 20.
So many people I speak to believe that a P/E ratio of less than 20 is the key to success. But statistics prove otherwise.
Don't get me wrong, lower P/E ratios in general are a good thing. But since different industries have different P/E ratios, it makes sense to do relative comparisons.
* Did you also know that stocks with crazy high growth rates test almost as poorly as those with the lowest growth rates?
Did your last loser have a spectacular growth rate?
If so, and it still got crushed, would you have picked it if you knew that stocks with the highest growth rates have spotty track records?
It seems logical to think that companies with the highest growth rates would do the best. But it doesn't always turn out to be the case.
One explanation for this is that sky high growth rates are unsustainable. And the moment a more normal (albeit still good) growth rate emerges, the stock gets a dose of reality as well.
Instead, I have found that comparing a stock to the median growth rate for its industry is the best way to find solid outperformers with a lesser chance to disappoint.
* Did you know that the top performing stocks each year will usually see their P/E ratios more than double from where it started?
* Did you also know that, historically, most of the best performers began their runs with P/Es over the 'magic' number of a P/E ratio of 20?
* And did you know that an even greater majority of the top performers finished with P/E ratios of well over 20?
If you only confine yourself to stocks with P/Es under 20, you'll be consistently keeping yourself from getting in on some of the best performing stocks each year.
Moreover, knowing that the top performers will typically see their P/E ratios rise (more than 100%) during their move, you'd be getting out the moment those stocks get above 20.
So many people I speak to believe that a P/E ratio of less than 20 is the key to success. But statistics prove otherwise.
Don't get me wrong, lower P/E ratios in general are a good thing. But since different industries have different P/E ratios, it makes sense to do relative comparisons.
Saturday, October 24, 2009
lessons from the bear market
Jason Zweig's latest book, Your Money and Your Brain, looks at how the brain responds when making real-life financial decisions. In an interview that appeared on Morningstar.com last week, Zweig, who writes The Intelligent Investor for The Wall Street Journal, shared some tips for overcoming your brain's worst impulses. In part two of that interview, he shares some wisdom for making good decisions during times of financial crisis.
Let's think back to October or November of last year or March of this year, when the Dow seemed to be headed toward 6,000, and people were just terrified. There's no doubt that millions of investors, both retail and professional alike, were acting out of sheer uncontrolled fear. And the level of stress that investors felt was unbelievable. And when people are afraid, and when you're feeling stress, not stress in the pop psychology sense but stress in the physiological sense, when your blood pressure goes up, you're sweating, your heart is racing, your hands are shaking, you can't sleep, and you're on the verge of depression, and you're snapping at your family and kicking your dog, people make bad decisions. And they make impulsive decisions, they make big decisions when they should be making small ones. Instead of making incremental adjustments to portfolios, instead of rebalancing at the margin, people bailed out of asset classes entirely or just moved completely into cash. The other thing that neuroeconomics suggests goes on in people's minds in a time of market panic is the automatic perception of illusory patterns--detecting "trends" in random data that simply are not there. Things that seem to be predictable loom much more important in people's minds. People develop a belief that the future is more knowable. That's stronger in a time of extreme uncertainty.
So what was I seeing in my e-mails were hundreds of messages from people about how the world was coming to an end, quite literally. "We're going into another Great Depression." "The financial markets will cease to function completely." "I'm stocking up on granola bars and bottled water and extra cartridges for my gun." I got any number of "I'm going off the grid" e-mails. And the thing that's surprising to me is not that all of that happened, because that's exactly the sort of thing I would have predicted. What has surprised me is how quickly the mindset has shifted. And now it seems that people have completely forgotten how they felt a few months ago. And that's very troubling to me. It suggests to me that we're nowhere near out of the woods. I do not tend to make market forecasts of any kind, but that worries me so much that I think we're probably in for another big surprise before we have a full recovery.
Let's think back to October or November of last year or March of this year, when the Dow seemed to be headed toward 6,000, and people were just terrified. There's no doubt that millions of investors, both retail and professional alike, were acting out of sheer uncontrolled fear. And the level of stress that investors felt was unbelievable. And when people are afraid, and when you're feeling stress, not stress in the pop psychology sense but stress in the physiological sense, when your blood pressure goes up, you're sweating, your heart is racing, your hands are shaking, you can't sleep, and you're on the verge of depression, and you're snapping at your family and kicking your dog, people make bad decisions. And they make impulsive decisions, they make big decisions when they should be making small ones. Instead of making incremental adjustments to portfolios, instead of rebalancing at the margin, people bailed out of asset classes entirely or just moved completely into cash. The other thing that neuroeconomics suggests goes on in people's minds in a time of market panic is the automatic perception of illusory patterns--detecting "trends" in random data that simply are not there. Things that seem to be predictable loom much more important in people's minds. People develop a belief that the future is more knowable. That's stronger in a time of extreme uncertainty.
So what was I seeing in my e-mails were hundreds of messages from people about how the world was coming to an end, quite literally. "We're going into another Great Depression." "The financial markets will cease to function completely." "I'm stocking up on granola bars and bottled water and extra cartridges for my gun." I got any number of "I'm going off the grid" e-mails. And the thing that's surprising to me is not that all of that happened, because that's exactly the sort of thing I would have predicted. What has surprised me is how quickly the mindset has shifted. And now it seems that people have completely forgotten how they felt a few months ago. And that's very troubling to me. It suggests to me that we're nowhere near out of the woods. I do not tend to make market forecasts of any kind, but that worries me so much that I think we're probably in for another big surprise before we have a full recovery.