Warren Buffett has gone into every economic recession with an excess of cash on the balance sheet. In these recessionary periods, the average company is trying to shore up assets and deleverage. That's when Buffett swoops in and buys companies for pennies on the dollar. Plus, because Berkshire Hathaway has excess cash and no debt, he doesn't have to deleverage. He can use ongoing operating profit from his business to buy other businesses, rather than use retained cash to increase the size of his cash pile.
Financial advisers will often tell clients to dollar-cost average even through a financial panic. However, most investors won't follow that advice. Because they don't want to buy low, they consistently lose money to people like Warren Buffett, who consistently buys low and sells high.
When investors buy Berkshire Hathaway stock, they buy into a CEO who has the right temperament for managing money.
Friday, June 27, 2014
Thursday, June 26, 2014
The Loser's Game
There are two types of games: "Winner’s Games" and "Loser’s Games."
Now this doesn’t mean that losers play only certain games, while winners
play other games. It has nothing to do with personality
characteristics. By "Loser’s Game," I don’t mean that investors are
losers. It is just a way to classify games to help us understand them
better.
The outcome of any competitive game depends upon the actions of both the winner and the loser of the game. This does not always imply the winner’s actions will dominate the outcome. Many games are not won, but rather, are lost. It is important to understand the distinction.
Winner’s Games are those games whose outcome is largely determined by the actions of the winner. Loser’s Games are those games whose outcome is largely determined by the actions of the loser.
Amateur tennis is a loser’s game. Non-highly-trained players do not possess the skills to deliver excellent serves and returns with consistency. An attempt to try harder to deliver superior shots, compared to the opponent, will not meet with success, but double faults and shots that go out of bounds. Trying harder to make great shots will mean that you are giving the opponent points. The player is not only competing against the other player, but also against the inherent difficulties of the game. The more competitive the amateur tries to be, the more the inherent difficulties of the game will beat him down.
The amateur who has not mastered the fundamentals of the game is far better off just trying to deliver a shot within the tennis court bounds than trying to outplay the opponent. Keep the ball in play and give the opponent the opportunity to mess up the shot. And, the harder the opponent tries, the more likely he will mess up!
If you were playing a professional tennis player, the situation would change drastically. Professional tennis is a winner’s game. Professional tennis players have mastered the fundamentals of the game. You must not only master the fundamentals of the game to win, but you must also deliver superior shots. You must outplay your opponent to win. Returning the ball within court bounds is not enough. The opponent probably won’t mess up and might well force a shot you can’t return.
Investing is a loser’s game. It is a loser’s game, not only at the amateur level, but also at the professional level. Over time, trying harder to achieve superior returns will usually lead to inferior returns. Trying to time the stock market, day trading, buying options, and most active investment advice approaches investing as though it were a winner’s game—believing you can actually conquer and beat the market.
If, for example, you had felt that the stock market was overvalued and due for a correction, and you had remained out of the stock market for the year 1995, you would have missed one of the market’s best years ever. But, maybe, you also missed the big market drop of 1987. What could you conclude from this? Probably, as with my streak of tennis losses, you would tend to remember the victories (or, near victory shots that led to losing the game!) and forget the defeats.
You reason that if only all your tennis shots or investment decisions had been as great as the best ones you remember, you would have won decisively! But, seeking that one great shot is what cost you the match.
You would tend to explain your victory as confirming proof of market timing and your skill to do it, while the defeat would be interpreted as only indicating a need to improve your methods slightly! You are interpreting investing, and more specifically, market timing, as though it were a winner’s game. It is not! It has never been shown that anyone, I repeat anyone, can master stock market timing.
Looking for stocks you feel might go up ten or twenty times from their present price in a few short years is also a form of trying to invest in the stock market as though it were a winner’s game. Or, given the late 1990’s you might be seeking growth stocks that go up 100 times or more in a few short years!
After all, you recall Dell, Cisco, Yahoo, and other companies which shot up by amazing amounts. To buy such speculative stocks implies you feel confident in finding opportunities that are grossly misevaluated by the market. Usually, you will not invest in the next Dell or Cisco, but, rather, the next He-Ro apparel company of the day. That is to say, a lousy investment. This can lead to huge losses.
Individual investors usually have not mastered business evaluation and fundamental analysis sufficiently to actively select the very best aggressively-chosen stocks from among the larger market. But don't feel bad. The professionals who are paid millions of dollars haven't done much better.
Understanding that investing is a loser’s game at heart should keep you from trying to force too many shots. Rather than looking for one big winner, aim for consistency in your results. The bulk of an intelligent investor’s portfolio should be invested in high-quality, larger companies purchased at reasonable prices. Such a portfolio will likely beat, not only a market timer’s portfolio, but also a speculative portfolio of "carefully" selected, aggressive stocks on a risk-adjusted basis.
[This seemed familiar. Looking in my copy of The Investor's Anthology, this article looks like a rip-off (or adaptation) of The Loser's Game by Charles Ellis. Ellis also apparently wrote a book around the article called Winning the Loser's Game, now in it's sixth edition.]
The outcome of any competitive game depends upon the actions of both the winner and the loser of the game. This does not always imply the winner’s actions will dominate the outcome. Many games are not won, but rather, are lost. It is important to understand the distinction.
Winner’s Games are those games whose outcome is largely determined by the actions of the winner. Loser’s Games are those games whose outcome is largely determined by the actions of the loser.
Amateur tennis is a loser’s game. Non-highly-trained players do not possess the skills to deliver excellent serves and returns with consistency. An attempt to try harder to deliver superior shots, compared to the opponent, will not meet with success, but double faults and shots that go out of bounds. Trying harder to make great shots will mean that you are giving the opponent points. The player is not only competing against the other player, but also against the inherent difficulties of the game. The more competitive the amateur tries to be, the more the inherent difficulties of the game will beat him down.
The amateur who has not mastered the fundamentals of the game is far better off just trying to deliver a shot within the tennis court bounds than trying to outplay the opponent. Keep the ball in play and give the opponent the opportunity to mess up the shot. And, the harder the opponent tries, the more likely he will mess up!
If you were playing a professional tennis player, the situation would change drastically. Professional tennis is a winner’s game. Professional tennis players have mastered the fundamentals of the game. You must not only master the fundamentals of the game to win, but you must also deliver superior shots. You must outplay your opponent to win. Returning the ball within court bounds is not enough. The opponent probably won’t mess up and might well force a shot you can’t return.
Investing is a loser’s game. It is a loser’s game, not only at the amateur level, but also at the professional level. Over time, trying harder to achieve superior returns will usually lead to inferior returns. Trying to time the stock market, day trading, buying options, and most active investment advice approaches investing as though it were a winner’s game—believing you can actually conquer and beat the market.
If, for example, you had felt that the stock market was overvalued and due for a correction, and you had remained out of the stock market for the year 1995, you would have missed one of the market’s best years ever. But, maybe, you also missed the big market drop of 1987. What could you conclude from this? Probably, as with my streak of tennis losses, you would tend to remember the victories (or, near victory shots that led to losing the game!) and forget the defeats.
You reason that if only all your tennis shots or investment decisions had been as great as the best ones you remember, you would have won decisively! But, seeking that one great shot is what cost you the match.
You would tend to explain your victory as confirming proof of market timing and your skill to do it, while the defeat would be interpreted as only indicating a need to improve your methods slightly! You are interpreting investing, and more specifically, market timing, as though it were a winner’s game. It is not! It has never been shown that anyone, I repeat anyone, can master stock market timing.
Looking for stocks you feel might go up ten or twenty times from their present price in a few short years is also a form of trying to invest in the stock market as though it were a winner’s game. Or, given the late 1990’s you might be seeking growth stocks that go up 100 times or more in a few short years!
After all, you recall Dell, Cisco, Yahoo, and other companies which shot up by amazing amounts. To buy such speculative stocks implies you feel confident in finding opportunities that are grossly misevaluated by the market. Usually, you will not invest in the next Dell or Cisco, but, rather, the next He-Ro apparel company of the day. That is to say, a lousy investment. This can lead to huge losses.
Individual investors usually have not mastered business evaluation and fundamental analysis sufficiently to actively select the very best aggressively-chosen stocks from among the larger market. But don't feel bad. The professionals who are paid millions of dollars haven't done much better.
Understanding that investing is a loser’s game at heart should keep you from trying to force too many shots. Rather than looking for one big winner, aim for consistency in your results. The bulk of an intelligent investor’s portfolio should be invested in high-quality, larger companies purchased at reasonable prices. Such a portfolio will likely beat, not only a market timer’s portfolio, but also a speculative portfolio of "carefully" selected, aggressive stocks on a risk-adjusted basis.
[This seemed familiar. Looking in my copy of The Investor's Anthology, this article looks like a rip-off (or adaptation) of The Loser's Game by Charles Ellis. Ellis also apparently wrote a book around the article called Winning the Loser's Game, now in it's sixth edition.]
add to stocks in retirement?
Benz: You have done some research. You co-authored a
paper with professor Wade Pfau where you looked at what equity
allocations should look like in retirement. And your research came up
with a somewhat counterintuitive finding, where you actually suggested
that equities should trend up as someone goes further in retirement.
Let's talk about your general findings and why you think that this is
maybe something that retirees should look at?
Kitces: Certainly the reactions to some of the research that we've done have been interesting at the suggestion that maybe equities should actually glide upward and you would get a little bit more aggressive through retirement.
We see a natural retiree bias toward that anyways. We don't really want to own any more equities than we have to. [They can be] a little volatile and a little scary. And we've had this kind of rule of thumb for a very long time of "Own your age in bonds, or 100 minus your age in stocks," all of which gets you to the same point. As you're getting older your equity exposure declines and that was a way to own fewer equities through retirement.
The problem is that particular approach where you decrease them over time, psychologically I think there is some comfort to it. Unfortunately from the research, it just doesn't work very well. [Financial expert] Bill Bengen did some work on this back in the late 1990s after he had done his initial safe withdrawal-rate research and found that decreasing equity exposure through your retirement hurts; you got lower income and withdrawal rates. Not a huge difference if you only did a little bit of trimming, but you got lower outcomes.
David Blanchett, Morningstar's head of retirement research, did a wonderful study on this six or seven years ago where he tested something like 43 different versions of decreasing equities--so you decrease by little a year or a lot every year, or a little bit and then more, or more and then a little bit--all the different ways that we could glide that equity exposure down. And basically what he found was just sticking with the same balanced portfolio and rebalancing to it worked better than all of these decreasing-equity-exposure approaches.
What Wade and I did was really just kind of take it one step further and ask, "If starting [with higher equity allocations] and coming down doesn't work very well and starting [at one level of allocation] and sticking [with that same level of allocation over time] goes better, what would happen if we started lower and glide it back up to where we were going to be in the first place?" So we'll own less in equities early on and will maybe end out with a portfolio that we would have held throughout anyways. So, if I were going to be 60%-40% in retirement, we're never going to go higher than 60%, but rather than being 60% equities every year, what if we went down to 30% in equities and then started gliding back up toward that original 60% target. And what we found was it actually works.
One of the key things to note about that coming right out of the gate, though, is equities would be gliding upward through retirement, starting from a much more conservative point. While a lot of the discussions around this have been framed as "How aggressive is it to be adding equities for people through retirement?"--what we were actually finding is that this is a strategy to give you lower equities in retirement, lower average equity exposure overall, just doing it in a manner that works a little bit better.
Kitces: Certainly the reactions to some of the research that we've done have been interesting at the suggestion that maybe equities should actually glide upward and you would get a little bit more aggressive through retirement.
We see a natural retiree bias toward that anyways. We don't really want to own any more equities than we have to. [They can be] a little volatile and a little scary. And we've had this kind of rule of thumb for a very long time of "Own your age in bonds, or 100 minus your age in stocks," all of which gets you to the same point. As you're getting older your equity exposure declines and that was a way to own fewer equities through retirement.
The problem is that particular approach where you decrease them over time, psychologically I think there is some comfort to it. Unfortunately from the research, it just doesn't work very well. [Financial expert] Bill Bengen did some work on this back in the late 1990s after he had done his initial safe withdrawal-rate research and found that decreasing equity exposure through your retirement hurts; you got lower income and withdrawal rates. Not a huge difference if you only did a little bit of trimming, but you got lower outcomes.
David Blanchett, Morningstar's head of retirement research, did a wonderful study on this six or seven years ago where he tested something like 43 different versions of decreasing equities--so you decrease by little a year or a lot every year, or a little bit and then more, or more and then a little bit--all the different ways that we could glide that equity exposure down. And basically what he found was just sticking with the same balanced portfolio and rebalancing to it worked better than all of these decreasing-equity-exposure approaches.
What Wade and I did was really just kind of take it one step further and ask, "If starting [with higher equity allocations] and coming down doesn't work very well and starting [at one level of allocation] and sticking [with that same level of allocation over time] goes better, what would happen if we started lower and glide it back up to where we were going to be in the first place?" So we'll own less in equities early on and will maybe end out with a portfolio that we would have held throughout anyways. So, if I were going to be 60%-40% in retirement, we're never going to go higher than 60%, but rather than being 60% equities every year, what if we went down to 30% in equities and then started gliding back up toward that original 60% target. And what we found was it actually works.
One of the key things to note about that coming right out of the gate, though, is equities would be gliding upward through retirement, starting from a much more conservative point. While a lot of the discussions around this have been framed as "How aggressive is it to be adding equities for people through retirement?"--what we were actually finding is that this is a strategy to give you lower equities in retirement, lower average equity exposure overall, just doing it in a manner that works a little bit better.
how rich people think
According to Steve Siebold, what separates the rich from the rest of us isn't so much what they do.
It's how they think.
Siebold spent nearly three decades interviewing millionaires around the world, and boiled his findings down in "How Rich People Think," a book he describes as "so brutally honest it will shock some and inspire others."
In it, he touches on everything from beliefs about the root of all evil to faith in what drives the financial markets and what parents should teach their children to set them up for financial success.
It's how they think.
Siebold spent nearly three decades interviewing millionaires around the world, and boiled his findings down in "How Rich People Think," a book he describes as "so brutally honest it will shock some and inspire others."
In it, he touches on everything from beliefs about the root of all evil to faith in what drives the financial markets and what parents should teach their children to set them up for financial success.
Tuesday, June 24, 2014
the most important metric
What is the most important metric tied to stock performance?
The complexity of the investment field makes it difficult to ever determine a “right” answer to this question. Benjamin Graham’s exploration in ‘The Intelligent Investor’ was the first work to provide convincing answers. But the 80 years following the book’s release have seen thousands of ever more complex theories and models all trying to answer this same inherent question. From the Nifty Fifty to the Dogs of the Dow to The Little Book That Beats the Market, it seems like everyone has offered a simple solution that
temporarily outperforms.
Wall Street has of course taken it several steps further with stock-correlation algorithms, momentum trading systems, and multi-variable back testing. But their long history of excessive fees and embarassing underperformance leaves little envy for their methods – at least in the minds of sophisticated investors. As value investors, we are wise enough to know that additional complication does not result in superior results.
But given the amount of data and calculation we are now able to perform, it makes sense to re-visit this age old question and finally produce a definitive result.
Two works of research will be referenced in this article. The first is by in-house GuruFocus analyst Vera Yuan. Her article, ‘Earnings, Free Cash Flow, Book Value? Which Parameters Are Stock Prices Most Correlated To?’, examined the stock price correlation to eight fundamental metrics across a full business cycle.
The picture here couldn’t be much clearer. When it comes to banking, investment and other financial stocks, book value is king. Book and tangible book were the consistent winners here across all four market periods.
Non-financial stocks produced similar results, albeit less overwhelmingly than the previous group.
However, one research study is not a sufficient basis from which to base our entire investment philosophy.
The second test for the validity of book value superiority was constructed by Tobias Carlisle of Greenbackd. He back tested this topic using 87 years of equity data in ‘Investing Using Price-to-Book Value Ratio or Book Equity-to-Market Equity Multiple (Backtests 1926 to 2013)’.
Carlisle’s research examined book value to stock price correlations back to 1926. Using a 3,715 stock sample with complete financial data, stocks were grouped into a value decile representing the 459 lowest price-to-book multiples and a glamour decile containing the 404 highest multiples. Unsurprisingly, the value group outperformed the higher multiple glamour group for the period.
***
Looking at my copy of What Works on Wall Street, "Over the long term, the market rewards low price-to-book ratios and punishes high ones. Yet the data show why investors are willing to overlook high price-to-book ratios -- for 20 years, large stocks with high price-to-book ratios did better than the Large Stocks universe. A high price-to-book ratio is one of the hallmarks of a growth stock, so high price-to-book ratios alone shouldn't keep you from buying a stock. But the long-term results should caution you against the highest price-to-book ratio stocks.
The complexity of the investment field makes it difficult to ever determine a “right” answer to this question. Benjamin Graham’s exploration in ‘The Intelligent Investor’ was the first work to provide convincing answers. But the 80 years following the book’s release have seen thousands of ever more complex theories and models all trying to answer this same inherent question. From the Nifty Fifty to the Dogs of the Dow to The Little Book That Beats the Market, it seems like everyone has offered a simple solution that
temporarily outperforms.
Wall Street has of course taken it several steps further with stock-correlation algorithms, momentum trading systems, and multi-variable back testing. But their long history of excessive fees and embarassing underperformance leaves little envy for their methods – at least in the minds of sophisticated investors. As value investors, we are wise enough to know that additional complication does not result in superior results.
But given the amount of data and calculation we are now able to perform, it makes sense to re-visit this age old question and finally produce a definitive result.
Two works of research will be referenced in this article. The first is by in-house GuruFocus analyst Vera Yuan. Her article, ‘Earnings, Free Cash Flow, Book Value? Which Parameters Are Stock Prices Most Correlated To?’, examined the stock price correlation to eight fundamental metrics across a full business cycle.
The picture here couldn’t be much clearer. When it comes to banking, investment and other financial stocks, book value is king. Book and tangible book were the consistent winners here across all four market periods.
Non-financial stocks produced similar results, albeit less overwhelmingly than the previous group.
However, one research study is not a sufficient basis from which to base our entire investment philosophy.
The second test for the validity of book value superiority was constructed by Tobias Carlisle of Greenbackd. He back tested this topic using 87 years of equity data in ‘Investing Using Price-to-Book Value Ratio or Book Equity-to-Market Equity Multiple (Backtests 1926 to 2013)’.
Carlisle’s research examined book value to stock price correlations back to 1926. Using a 3,715 stock sample with complete financial data, stocks were grouped into a value decile representing the 459 lowest price-to-book multiples and a glamour decile containing the 404 highest multiples. Unsurprisingly, the value group outperformed the higher multiple glamour group for the period.
***
Looking at my copy of What Works on Wall Street, "Over the long term, the market rewards low price-to-book ratios and punishes high ones. Yet the data show why investors are willing to overlook high price-to-book ratios -- for 20 years, large stocks with high price-to-book ratios did better than the Large Stocks universe. A high price-to-book ratio is one of the hallmarks of a growth stock, so high price-to-book ratios alone shouldn't keep you from buying a stock. But the long-term results should caution you against the highest price-to-book ratio stocks.
Buffett's Alpha (again)
In their paper Buffett’s Alpha, Andrea Frazzini, David
Kabiller, and Lasse Heje Pedersen analyzed Buffett’s returns from
1976–2011 and decomposed them to identify the primary factors driving
Buffett’s significant alpha. For regular followers of Buffett, the
results should come as no surprise, but let’s dig in and discuss the
three primary sources of Buffett’s alpha …
In summary, the authors regressed Buffett’s returns against factor exposures commonly known to influence returns. The three factors that showed as significant are forehead-slappingly obvious.
Buffett’s worst years were at the height of the TMT bubble when the market saw his way of investing as out of date and not fit for this “new era” of investing. (Side note: Whenever something is said to be in a “new era” or of a “new paradigm,” do yourself a favor and short the ever-loving shit out of those securities—it’ll be like winning a rigged lottery because all those words really mean is “BUBBLE!” and bubbles always burst).
Despite this external pressure, Buffett stuck to his process and made an absolute killing in the tech wreck years that followed. Being a value investor often means you are taking a contrarian view by definition, which can be hard for humans. We are hardwired to take our social cues from the herd, so maintaining an opposite view requires determination and guts.
Do your homework better than the other person, stick to your process, and you too can tilt the odds in your favor.
[see also Buffett's Alpha]
In summary, the authors regressed Buffett’s returns against factor exposures commonly known to influence returns. The three factors that showed as significant are forehead-slappingly obvious.
- Value: Buffett has a tendency to favor low price-to-book value stocks.
- Safe: He bets against beta in that he favors low beta stocks.
- Quality: Finally, he favors quality companies (profitable, growing) over junky companies.
Buffett’s worst years were at the height of the TMT bubble when the market saw his way of investing as out of date and not fit for this “new era” of investing. (Side note: Whenever something is said to be in a “new era” or of a “new paradigm,” do yourself a favor and short the ever-loving shit out of those securities—it’ll be like winning a rigged lottery because all those words really mean is “BUBBLE!” and bubbles always burst).
Despite this external pressure, Buffett stuck to his process and made an absolute killing in the tech wreck years that followed. Being a value investor often means you are taking a contrarian view by definition, which can be hard for humans. We are hardwired to take our social cues from the herd, so maintaining an opposite view requires determination and guts.
Do your homework better than the other person, stick to your process, and you too can tilt the odds in your favor.
[see also Buffett's Alpha]
Monday, June 23, 2014
Millionaire Mistakes
In a recent survey, high net-worth clients (those with more than $1
million in assets) were asked about their top five investing mistakes.
Not surprisingly, some of these are ones that everyone faces, regardless
of net worth. Some of these mistakes can be very costly, making the
difference between financial dependence and financial independence.
Here are the top mistakes and what you can do about them.
1) Failing To Diversify. Almost a quarter of millionaires said their top investing mistake was not diversifying enough. No matter how much you make, diversifying is crucial to investment success. Karl Eller was a founding investor in the Phoenix Suns, built a successful advertising business and was head of Columbia Pictures. He invested almost his entire net worth on purchasing the convenience store chain Circle K. Under his leadership, it grew considerably, but he failed to diversify. When Circle K declared bankruptcy in 1990, he lost close to $1 billion and left with almost nothing. In an interview with Tony Robbins, he mentioned that lack of diversifying was the biggest mistake he made. Spreading your investments around is one of the best ways to manage and lower risk. It has to be done correctly. Diversifying only is helpful if each different investment has a different risk profile. Spreading your money around different tech stocks is not the same as spreading it around different industries. If the tech industry takes a hit, the other industries may bolster your investment portfolio.
2) Investing Without A Plan. If you fail to plan, you will plan to fail! Investing without a plan is gambling — 22 percent of millionaires regret not creating an investment plan. A good plan will help you set goals, choose the right type of investments and stay disciplined. Studies show that people with an investment plan will outperform those who do not. Visit artofthinkingsmart.com for sample plans.
3) Making Emotional Decisions. About 20 percent stated that emotional investing decisions have been their biggest mistake in the past. Emotional investors buy when things are going well and sell when things are going bad. This is the opposite of what they should be doing. Sticking to your plan and working with a financial adviser will help prevent emotional decisions.
4) Failing To Review A Portfolio. Sixteen percent said they failed to regularly review their financial plans and portfolios. As the market changes, investors should review and rebalance on a regular basis. As your goals, time horizon and risk changes, you will need to adjust your investments to be in line with your updated investment profile.
5) Fixating On Previous Returns. Fourteen percent said they relied too much on historical returns and not enough on future expectations. Just like an athlete who may have had a good season in the past, it doesn’t necessarily mean he or she will do well this season. It can be one criteria, but it should not be the basis of your investment decision. Studies have shown that many mutual funds that were in the top percentage of their category were in the lower performance categories later on.
david@artofthinkingsmart.com
Here are the top mistakes and what you can do about them.
1) Failing To Diversify. Almost a quarter of millionaires said their top investing mistake was not diversifying enough. No matter how much you make, diversifying is crucial to investment success. Karl Eller was a founding investor in the Phoenix Suns, built a successful advertising business and was head of Columbia Pictures. He invested almost his entire net worth on purchasing the convenience store chain Circle K. Under his leadership, it grew considerably, but he failed to diversify. When Circle K declared bankruptcy in 1990, he lost close to $1 billion and left with almost nothing. In an interview with Tony Robbins, he mentioned that lack of diversifying was the biggest mistake he made. Spreading your investments around is one of the best ways to manage and lower risk. It has to be done correctly. Diversifying only is helpful if each different investment has a different risk profile. Spreading your money around different tech stocks is not the same as spreading it around different industries. If the tech industry takes a hit, the other industries may bolster your investment portfolio.
2) Investing Without A Plan. If you fail to plan, you will plan to fail! Investing without a plan is gambling — 22 percent of millionaires regret not creating an investment plan. A good plan will help you set goals, choose the right type of investments and stay disciplined. Studies show that people with an investment plan will outperform those who do not. Visit artofthinkingsmart.com for sample plans.
3) Making Emotional Decisions. About 20 percent stated that emotional investing decisions have been their biggest mistake in the past. Emotional investors buy when things are going well and sell when things are going bad. This is the opposite of what they should be doing. Sticking to your plan and working with a financial adviser will help prevent emotional decisions.
4) Failing To Review A Portfolio. Sixteen percent said they failed to regularly review their financial plans and portfolios. As the market changes, investors should review and rebalance on a regular basis. As your goals, time horizon and risk changes, you will need to adjust your investments to be in line with your updated investment profile.
5) Fixating On Previous Returns. Fourteen percent said they relied too much on historical returns and not enough on future expectations. Just like an athlete who may have had a good season in the past, it doesn’t necessarily mean he or she will do well this season. It can be one criteria, but it should not be the basis of your investment decision. Studies have shown that many mutual funds that were in the top percentage of their category were in the lower performance categories later on.
david@artofthinkingsmart.com
Investment Wisdom
Unfortunately, over the period of 1994 to 2013, the average investor
earned only 5 percent while the average stock fund returned 8 percent
annually. Why? And how can we get our money to work better for us?
These next two weeks I will cover the essential wisdom of the greatest investors and how you can use them for your benefit.
* “Individuals who cannot master their emotions are ill-suited to profit from the investment process.” -Benjamin Graham, father of value investing and mentor to Warren Buffett.
Ben is saying that we need to avoid destructive investor behavior. Emotions can be our greatest enemy when it comes to investing and wreak havoc on our ability to build long-term wealth. I mentioned that the average investor sacrificed close to half of their potential return.
This gap is called the “investor behavior penalty.” This is because they engaged in negative behaviors like chasing the hot fund manager, stock or asset class, avoided areas of the market that were out of favor, attempted to time the market, or just abandoned their investment plan.
The greatest investors know that building long-term wealth requires the ability to control one’s emotions and avoid self-destructive behavior.
* “History provides a crucial insight regarding market crises: They are inevitable, painful, and ultimately surmountable.” -Shelby M.C. Davis, legendary investor.
History has shown that the stock market will always encounter crises and uncertainty, but the market has continued to go up over the long-term. The greatest investors understand that short-term underperformance and volatility are unavoidable.
Ninety-five percent of the top fund managers from 2004 to 2013 fell into the bottom half of their peer groups, with 73 percent falling into the bottom quarter of their peer groups for at least one three-year period. Even though these professional managers delivered great long-term returns for a decade, almost all of them experienced some difficult short-term stretches.
Investors who understand and recognize this are less likely to engage in the “investor behavior penalty” and make unnecessary and often bad decisions with their investments.
The greatest investors understand that we shouldn’t overreact to short-term fluctuations of the market.
By being disciplined, sticking to your personal investment plan, and avoiding destructive behavior, you are better positioned to benefit from the long-term growth potential of the stock market.
***
* “Though frustrating, stretches of disappointing results for the market are not unprecedented. History shows, however, that these difficult stretches have been followed by periods of recovery. Why? Because lower prices increase future returns.” -Christopher C. Davis, portfolio manager, Davis Advisors. History shows that after disappointing 10-year periods for the stock market, the average return for the next 10-year period is 13 percent per year! Nobody knows what the next 10 years will bring, but investors with long-term goals should look into maintaining or even adding to their stock allocation after a prolonged stretch of poor returns. It may be tempting to sell or abandon stocks, but this would be selling at the wrong time. Investors should be confident that stocks in the long term will go up after a prolonged period of bad returns. Why? Because low prices help increase future returns and opportunity.
* “Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in the corrections themselves.” -Peter Lynch, legendary investor and author. When the market goes down, many investors move out of stocks with the intention of coming back in when they think it will go up. Unfortunately, this has led to disastrous results. If patient investors remained in the stock market the past 20 years, they would have received 9.2 percent per year. If these same investors, however, missed the best 30 days during this 20-year period, their investment would have remained flat! If they missed the best 60 days, they would have lost a significant amount in the market. Nobody knows when these best 30 or 60 days will be, so attempting to time the market will hurt you more than just staying in and riding out the market corrections.
* “Be fearful when others are greedy. Be greedy when others are fearful.” -Warren Buffett, legendary investor and chairman of Berkshire Hathaway. Building long-term financial wealth involves counter-emotional investment decisions. Investors want to buy when there is maximum pessimism with the market, and sell (or resist buying) when there is maximum euphoria and excitement with the market. The stock market was booming from 1997 to 1999, with record amounts of money flowing in 2000. Unfortunately, they just got in to experience terrible years of returns from 2000 to 2002. Many of the same investors sold during this downturn, only to see the market go up more than 30 percent in 2003! This happened again in 2008, when many pulled out of the stock market at the bottom, missing the subsequent double-digit returns a few years later.
The greatest investors understand that an unemotional, rational and disciplined investment approach is crucial to building long-term financial wealth.
-- by David Chang, MidWeek
These next two weeks I will cover the essential wisdom of the greatest investors and how you can use them for your benefit.
* “Individuals who cannot master their emotions are ill-suited to profit from the investment process.” -Benjamin Graham, father of value investing and mentor to Warren Buffett.
Ben is saying that we need to avoid destructive investor behavior. Emotions can be our greatest enemy when it comes to investing and wreak havoc on our ability to build long-term wealth. I mentioned that the average investor sacrificed close to half of their potential return.
This gap is called the “investor behavior penalty.” This is because they engaged in negative behaviors like chasing the hot fund manager, stock or asset class, avoided areas of the market that were out of favor, attempted to time the market, or just abandoned their investment plan.
The greatest investors know that building long-term wealth requires the ability to control one’s emotions and avoid self-destructive behavior.
* “History provides a crucial insight regarding market crises: They are inevitable, painful, and ultimately surmountable.” -Shelby M.C. Davis, legendary investor.
History has shown that the stock market will always encounter crises and uncertainty, but the market has continued to go up over the long-term. The greatest investors understand that short-term underperformance and volatility are unavoidable.
Ninety-five percent of the top fund managers from 2004 to 2013 fell into the bottom half of their peer groups, with 73 percent falling into the bottom quarter of their peer groups for at least one three-year period. Even though these professional managers delivered great long-term returns for a decade, almost all of them experienced some difficult short-term stretches.
Investors who understand and recognize this are less likely to engage in the “investor behavior penalty” and make unnecessary and often bad decisions with their investments.
The greatest investors understand that we shouldn’t overreact to short-term fluctuations of the market.
By being disciplined, sticking to your personal investment plan, and avoiding destructive behavior, you are better positioned to benefit from the long-term growth potential of the stock market.
***
* “Though frustrating, stretches of disappointing results for the market are not unprecedented. History shows, however, that these difficult stretches have been followed by periods of recovery. Why? Because lower prices increase future returns.” -Christopher C. Davis, portfolio manager, Davis Advisors. History shows that after disappointing 10-year periods for the stock market, the average return for the next 10-year period is 13 percent per year! Nobody knows what the next 10 years will bring, but investors with long-term goals should look into maintaining or even adding to their stock allocation after a prolonged stretch of poor returns. It may be tempting to sell or abandon stocks, but this would be selling at the wrong time. Investors should be confident that stocks in the long term will go up after a prolonged period of bad returns. Why? Because low prices help increase future returns and opportunity.
* “Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in the corrections themselves.” -Peter Lynch, legendary investor and author. When the market goes down, many investors move out of stocks with the intention of coming back in when they think it will go up. Unfortunately, this has led to disastrous results. If patient investors remained in the stock market the past 20 years, they would have received 9.2 percent per year. If these same investors, however, missed the best 30 days during this 20-year period, their investment would have remained flat! If they missed the best 60 days, they would have lost a significant amount in the market. Nobody knows when these best 30 or 60 days will be, so attempting to time the market will hurt you more than just staying in and riding out the market corrections.
* “Be fearful when others are greedy. Be greedy when others are fearful.” -Warren Buffett, legendary investor and chairman of Berkshire Hathaway. Building long-term financial wealth involves counter-emotional investment decisions. Investors want to buy when there is maximum pessimism with the market, and sell (or resist buying) when there is maximum euphoria and excitement with the market. The stock market was booming from 1997 to 1999, with record amounts of money flowing in 2000. Unfortunately, they just got in to experience terrible years of returns from 2000 to 2002. Many of the same investors sold during this downturn, only to see the market go up more than 30 percent in 2003! This happened again in 2008, when many pulled out of the stock market at the bottom, missing the subsequent double-digit returns a few years later.
The greatest investors understand that an unemotional, rational and disciplined investment approach is crucial to building long-term financial wealth.
-- by David Chang, MidWeek
Tuesday, June 17, 2014
sell, sell, sell
Don't look now, but the Dow Jones Industrial Average ($INDU +0.16%) is suffering a technical breakdown.
On Tuesday, the index crashed unceremoniously through its 50-day moving average -- a level that has held it up for two months after not one, not two, not three but four separate tests.
The bulls have their buy orders locked in at this level. Can the bears overrun them?
Yes, the Dow is rebounding some Wednesday. But given all the other evidence, including technical (weak volume and breadth), sentiment (options prices on the "fear gauge" is at the lowest level in at least eight years), and fundamentals (economic data has been weak both here at home and overseas), I think they will.
And if so, these three dogs of the Dow are headed for trouble.
-- By Anthony Mirhaydari
The article was written on May 21, 2014. The three dogs named were INTC (at 25.99), WMT (at 75.72), IBM (at 186.44).
Their current prices a month later (6/17/14) are 29.95, 74.99, and 182.26. Hey, two out of three ain't bad, especially since the market is up since then. (Actually pretty good.)
What does this mean to me? Buy WMT and IBM.
On Tuesday, the index crashed unceremoniously through its 50-day moving average -- a level that has held it up for two months after not one, not two, not three but four separate tests.
The bulls have their buy orders locked in at this level. Can the bears overrun them?
Yes, the Dow is rebounding some Wednesday. But given all the other evidence, including technical (weak volume and breadth), sentiment (options prices on the "fear gauge" is at the lowest level in at least eight years), and fundamentals (economic data has been weak both here at home and overseas), I think they will.
And if so, these three dogs of the Dow are headed for trouble.
-- By Anthony Mirhaydari
The article was written on May 21, 2014. The three dogs named were INTC (at 25.99), WMT (at 75.72), IBM (at 186.44).
Their current prices a month later (6/17/14) are 29.95, 74.99, and 182.26. Hey, two out of three ain't bad, especially since the market is up since then. (Actually pretty good.)
What does this mean to me? Buy WMT and IBM.
Monday, June 16, 2014
a perfect portfolio?
Like most people who write about finance, I have a problem.
My job makes it effectively impossible for me to manage my own investment portfolio. When I first became a full-time investment writer back in 2007, I had to sell all my stock . . . in Diageo (DEO), Amazon (AMZN) and Berkshire Hathaway (BRK.A). (I don’t even want to think about how much that cost me.)
So where does this leave me?
Oddly enough, it leaves me in a very good place . . . for a financial writer. Because it means that by accident I have landed in the same spot as a great many readers: It leaves me looking for a new way.
I want a simple investment portfolio that I don't have to fool around with, and which I know maximizes my chances of earning a good long-term return, and minimizes my chance of ending up in the poor house.
I want an investment portfolio that is exposed to all likely environments, and committed to none. One which is based on intelligence and reasonable suppositions about the future, and not merely data mining from the past.
Have I found it? I think I may have.
To reach this solution, I've spent more than six months plucking at the sleeve of every wise investment expert I know. I've tapped the opinions of the bullish and the bearish, the optimistic and the fearful. I looked up the investment strategy of a tycoon in medieval Germany.
Here are the principles I've relied upon:
The portfolio, in the words of Albert Einstein, should be as simple as possible, but no simpler.
It is based on humility. I don't know what's going to happen next, nor does anyone else. It is prepared for all potential economic environments, but committed to none.
The portfolio is weighted toward equities, because even most bears concede that those have produced the highest long-term returns.
The portfolio is exposed to natural-resource stocks and to real estate, as distinct asset classes which have often done very well during periods of inflation, when other assets have done badly. It prefers natural-resource stocks to pure commodities, despite their equity risk, because they generate income and because "commodity funds" are often hosed by fees and trading costs.
The portfolio owns long-dated "zero coupon" Treasury bonds as insurance. They are the one thing that has gone up in a crash, such as in 1929, 1987 and 2008.
The portfolio owns long-dated Treasury Inflation Protected Securities, which offer some hedge against inflation and deflation.
The portfolio is truly global in its exposure to stocks, bonds, natural resources and real estate, because the U.S. is just a small, and shrinking, percentage of the world economy.
The portfolio uses periodic rebalancing to take advantage of "reversion to the mean." Rebalancing allows you to benefit from volatility and contrarianism without actually having to sweat.
The portfolio includes cash, or a near-equivalent, because as the financial consultant Andrew Smithers, the GMO strategist James Montier and the late investment legend Sir John Templeton have all argued, cash is a distinct asset class, and it is correlated with nothing else.
The portfolio takes advantage of research showing that "riskier" stocks have tended to produce worse returns over time than higher quality or less volatile stocks, and for sound reasons.
The portfolio also keeps its costs as low as possible, because fees are a straight loss.
nd so, what is in this all-weather portfolio?
It's 10 percent each in the following 10 asset classes:
U.S. "minimum volatility" stocks
International developed "minimum volatility" stocks
Emerging markets "minimum volatility" stocks
Global natural-resource stocks
U.S. real estate investment trusts
International real estate investment trusts
30-year zero-coupon Treasury bonds
30-year TIPS
Global bonds
Two-year Treasury bonds (cash equivalent)
For simplicity's sake, the portfolio I've modeled is rebalanced once a year, on Dec. 30.
I suspect performance in the last 15 years has been flattered unduly by the boom in emerging markets, which were in crisis in the late 1990s. I would be staggered if this portfolio produced a similar performance over the next 15 years to what it has produced over the last 15. However, what are the alternatives? It entails much broader diversification, and lower risk, than the three alternatives I've included (the "balanced" portfolio in the chart, by the way, is 60 percent MSCI All-World Stock and 40 percent U.S. Intermediate Bond Index).
I still think those of you who manage a portfolio of individual securities can earn the best returns, so long as you approach the task with great wisdom. But for the rest of us, this all-weather portfolio may be a good alternative.
By Brett Arends, MarketWatch
My job makes it effectively impossible for me to manage my own investment portfolio. When I first became a full-time investment writer back in 2007, I had to sell all my stock . . . in Diageo (DEO), Amazon (AMZN) and Berkshire Hathaway (BRK.A). (I don’t even want to think about how much that cost me.)
So where does this leave me?
Oddly enough, it leaves me in a very good place . . . for a financial writer. Because it means that by accident I have landed in the same spot as a great many readers: It leaves me looking for a new way.
I want a simple investment portfolio that I don't have to fool around with, and which I know maximizes my chances of earning a good long-term return, and minimizes my chance of ending up in the poor house.
I want an investment portfolio that is exposed to all likely environments, and committed to none. One which is based on intelligence and reasonable suppositions about the future, and not merely data mining from the past.
Have I found it? I think I may have.
To reach this solution, I've spent more than six months plucking at the sleeve of every wise investment expert I know. I've tapped the opinions of the bullish and the bearish, the optimistic and the fearful. I looked up the investment strategy of a tycoon in medieval Germany.
Here are the principles I've relied upon:
The portfolio, in the words of Albert Einstein, should be as simple as possible, but no simpler.
It is based on humility. I don't know what's going to happen next, nor does anyone else. It is prepared for all potential economic environments, but committed to none.
The portfolio is weighted toward equities, because even most bears concede that those have produced the highest long-term returns.
The portfolio is exposed to natural-resource stocks and to real estate, as distinct asset classes which have often done very well during periods of inflation, when other assets have done badly. It prefers natural-resource stocks to pure commodities, despite their equity risk, because they generate income and because "commodity funds" are often hosed by fees and trading costs.
The portfolio owns long-dated "zero coupon" Treasury bonds as insurance. They are the one thing that has gone up in a crash, such as in 1929, 1987 and 2008.
The portfolio owns long-dated Treasury Inflation Protected Securities, which offer some hedge against inflation and deflation.
The portfolio is truly global in its exposure to stocks, bonds, natural resources and real estate, because the U.S. is just a small, and shrinking, percentage of the world economy.
The portfolio uses periodic rebalancing to take advantage of "reversion to the mean." Rebalancing allows you to benefit from volatility and contrarianism without actually having to sweat.
The portfolio includes cash, or a near-equivalent, because as the financial consultant Andrew Smithers, the GMO strategist James Montier and the late investment legend Sir John Templeton have all argued, cash is a distinct asset class, and it is correlated with nothing else.
The portfolio takes advantage of research showing that "riskier" stocks have tended to produce worse returns over time than higher quality or less volatile stocks, and for sound reasons.
The portfolio also keeps its costs as low as possible, because fees are a straight loss.
nd so, what is in this all-weather portfolio?
It's 10 percent each in the following 10 asset classes:
U.S. "minimum volatility" stocks
International developed "minimum volatility" stocks
Emerging markets "minimum volatility" stocks
Global natural-resource stocks
U.S. real estate investment trusts
International real estate investment trusts
30-year zero-coupon Treasury bonds
30-year TIPS
Global bonds
Two-year Treasury bonds (cash equivalent)
For simplicity's sake, the portfolio I've modeled is rebalanced once a year, on Dec. 30.
I suspect performance in the last 15 years has been flattered unduly by the boom in emerging markets, which were in crisis in the late 1990s. I would be staggered if this portfolio produced a similar performance over the next 15 years to what it has produced over the last 15. However, what are the alternatives? It entails much broader diversification, and lower risk, than the three alternatives I've included (the "balanced" portfolio in the chart, by the way, is 60 percent MSCI All-World Stock and 40 percent U.S. Intermediate Bond Index).
I still think those of you who manage a portfolio of individual securities can earn the best returns, so long as you approach the task with great wisdom. But for the rest of us, this all-weather portfolio may be a good alternative.
By Brett Arends, MarketWatch
Sunday, June 15, 2014
Summers says..
None other than Larry Summers, the former Secretary of the Treasury, advanced the Bull Case for the stock market to defy those calling for a correction. He predicts it will continue to head substantially higher. Summers' bull-market case is fascinating.
His thesis is that the economy has structurally changed. This change is basically that capital and labor are no longer complementary.
In the past, to produce goods you needed people, and people needed machines to produce goods. If you were running an automobile factory in the 1950's, you needed assembly line workers plus the machines or capital that were used by the people.
What Larry Summers is proposing is that, starting in the late 90's, capital began to be not a complement but a substitute for labor. Essentially, the automobile factory no longer needs the same ratio of people to machines. Effectively, the people making the cars can be replaced with technology.
This is causing the aggregate share of labor income to decline and the share of capital to rise. From a common sense perspective, if capital is a substitute for labor the economic pie is going to go more and more to those that own the capital and less to those that own the labor. This is the explanation for the growing amount of income inequality in the world. People are being replaced by technology and the capitalists are taking greater and greater gains from economic growth.
This disruption is extremely positive for publicly traded corporations. We would expect to see higher profit margins in aggregate as a result of low wage growth and this is exactly what we are witnessing.
His thesis is that the economy has structurally changed. This change is basically that capital and labor are no longer complementary.
In the past, to produce goods you needed people, and people needed machines to produce goods. If you were running an automobile factory in the 1950's, you needed assembly line workers plus the machines or capital that were used by the people.
What Larry Summers is proposing is that, starting in the late 90's, capital began to be not a complement but a substitute for labor. Essentially, the automobile factory no longer needs the same ratio of people to machines. Effectively, the people making the cars can be replaced with technology.
This is causing the aggregate share of labor income to decline and the share of capital to rise. From a common sense perspective, if capital is a substitute for labor the economic pie is going to go more and more to those that own the capital and less to those that own the labor. This is the explanation for the growing amount of income inequality in the world. People are being replaced by technology and the capitalists are taking greater and greater gains from economic growth.
This disruption is extremely positive for publicly traded corporations. We would expect to see higher profit margins in aggregate as a result of low wage growth and this is exactly what we are witnessing.
If this shift from capital being a complement to labor to becoming a
replacement for labor is truly here, the effect will be twofold:
- First and foremost, interest rates will remain much lower for a longer time than anyone is currently anticipating. With capital replacing labor, wages remain under pressure. As I have said many times, there has never been a period of price inflation that has not been accompanied by a period of wage inflation.
- Second, and most important to investors, the stock market should go much higher than what people, including me are anticipating. If technological advances are causing capital to get a greater percentage of the economic pie than it used to, the best course of action is to own the capital. In other words, invest in the stock market.
What Do I Think of This?
Well, an old saw of wisdom is that when people start saying that "This time it is different," they are usually mistaken. The theory that capital and technology are becoming substitutes for labor is a well thought out, if not brilliant argument. It explains why interest rates are globally low, profit margins are high, wages are stagnant, inflation is benign, inequality is rising, and yet the market keeps heading higher and the P/E multiple keeps expanding. The theory explains the data, but brilliant theories usually do.
However, I tend to feel that the more things change the more they stay the same especially with regard to the equity market. This time around nothing is different.
Wages will eventually go up, inflation will return, interest rates will rise and the market will appreciate not at an accelerated rate but at its historical rate of 6% above the risk-free interest rates.
Summers' argument is very powerful, but it is simply a brilliant way of saying "This time things are different."
-- Mitch Zacks, ZIM Weekly Update
Saturday, June 14, 2014
p/e 84?
Now the RUT rally has exceeded even my expectations for how quickly it could get back to 1180. I'm sure there is a fair amount of "bear hunting" going on, but some of my favorite small caps are acting great for good reasons and I want to buy more. In fact, I did buy one today.
But, here's the number that still bothers the bears the most about the RUT: 84.
That's the 12-month trailing P/E for the index. [wsj has it at 83. they have the Nasdaq at 22, the S&P 500 at 19, the Dow at 16. I thought the average was more like 16? Well let's look at the VFINX. Morningstar has it at 16.67.]
That is worrisome. But here's another number the bears should focus on: 19.
That's the 12-month forward P/E.
Now, of course, I'm not saying that I believe the RUT will fulfill those wonderful forward estimates. But that's not the point.
The point is that many large investors are piling fresh cash into many small companies that they believe will move from a triple-digit P/E to a double-digit one, or that they believe will be doubling or tripling their sales in the next year.
-- Kevin Cook
[not that p/e 19 is all that low -- and the market is apparently a bit more expensive than I thought]
But, here's the number that still bothers the bears the most about the RUT: 84.
That's the 12-month trailing P/E for the index. [wsj has it at 83. they have the Nasdaq at 22, the S&P 500 at 19, the Dow at 16. I thought the average was more like 16? Well let's look at the VFINX. Morningstar has it at 16.67.]
That is worrisome. But here's another number the bears should focus on: 19.
That's the 12-month forward P/E.
Now, of course, I'm not saying that I believe the RUT will fulfill those wonderful forward estimates. But that's not the point.
The point is that many large investors are piling fresh cash into many small companies that they believe will move from a triple-digit P/E to a double-digit one, or that they believe will be doubling or tripling their sales in the next year.
-- Kevin Cook
[not that p/e 19 is all that low -- and the market is apparently a bit more expensive than I thought]
Friday, June 06, 2014
buy high?
Today's stock market exhibits plenty of worrisome signs. Stocks of small companies have been sinking, which is often a bad sign for the broader market. Economic growth remains sluggish years after the worst recession since the Great Depression. Vladimir Putin's mischief ultimately threatens the crucial flow of natural gas from Russia to Western Europe.
Why buy now, when the leading market indexes are at record highs?
Because a review of recent history shows that the date you pick to invest doesn't matter that much, even if you invest at the market's highest level of the year.
Sound crazy? Dan Wiener, editor of "The Independent Adviser for Vanguard Investors," compared the records of two hypothetical investors over the past 30 years. Each started by investing $1,000 in the Standard & Poor's 500 index ($INX +0.46%) at the end of 1983. (Of course, you can't buy an index, but you can invest in a low-cost index fund.)
Over the subsequent 30 years, each investor put $1,000 annually into the S&P 500. But investor No. 1 bought on the last trading day of the year, while investor No. 2 bought at the S&P's highest point each year. In other words, investor No. 2 bought on the worst possible day each year.
Here's the surprise: At the end of 30 years, investor No. 1 had achieved an annualized return of 9.9 percent, while investor No. 2 earned an annualized return of 9.5 percent. The difference in returns was just 0.4 percentage point per year, on average.
***
Of course, if you could accurately time the stock market, you could enrich yourself enormously. Over the past five years through April 30, the S&P 500 returned a sizzling 19.1 percent annualized. But from December 31, 1999, through April 30, the index returned only 3.7 percent annualized. So clever market timing would have done far better than buying and holding through this period, which included two vicious bear markets.
Why buy now, when the leading market indexes are at record highs?
Because a review of recent history shows that the date you pick to invest doesn't matter that much, even if you invest at the market's highest level of the year.
Sound crazy? Dan Wiener, editor of "The Independent Adviser for Vanguard Investors," compared the records of two hypothetical investors over the past 30 years. Each started by investing $1,000 in the Standard & Poor's 500 index ($INX +0.46%) at the end of 1983. (Of course, you can't buy an index, but you can invest in a low-cost index fund.)
Over the subsequent 30 years, each investor put $1,000 annually into the S&P 500. But investor No. 1 bought on the last trading day of the year, while investor No. 2 bought at the S&P's highest point each year. In other words, investor No. 2 bought on the worst possible day each year.
Here's the surprise: At the end of 30 years, investor No. 1 had achieved an annualized return of 9.9 percent, while investor No. 2 earned an annualized return of 9.5 percent. The difference in returns was just 0.4 percentage point per year, on average.
***
Of course, if you could accurately time the stock market, you could enrich yourself enormously. Over the past five years through April 30, the S&P 500 returned a sizzling 19.1 percent annualized. But from December 31, 1999, through April 30, the index returned only 3.7 percent annualized. So clever market timing would have done far better than buying and holding through this period, which included two vicious bear markets.
Monday, June 02, 2014
which index fund?
Buffett is directing that 90% of the cash he's leaving to his wife should be put in an S&P 500 index fund.
Buffett suggests Vanguard's, but there are other index funds.
Here's what I wrote last year, when contemplating switching out of my holdings of FDGFX.
Buffett suggests Vanguard's, but there are other index funds.
Here's what I wrote last year, when contemplating switching out of my holdings of FDGFX.
Morningstar rates it two stars. They had 537 stock holdings with turnover of 63%. That's more holdings than the S&P 500. You might as well just hold an index fund, like the Spartan 500 Index Fund (FUSEX).
FDGFX's top holdings are AAPL, WFC, GOOG, C, PG, JNJ, PM, BRK.B. Which sounds fine to me.
FUSEX holds, naturally enough, 500 stock holdings with turnover of 4%. The top holdings are AAPL, XOM, MSFT, JNJ, CVX, GE, GOOG, IBM, PG, PFE, T, BRK.B, JPM, WFC, KO. Didn't realize that BRK.B is up there in the index.
Looking at the ten year returns of the Fidelity U.S. stock funds, FDGFX returned 6.66%, FDSSX 7.46%, FUSEX 7.81%, FCNTX 10.58%, FLPSX 12.31%. So I'd say it's the odd fund out.
Looking at the current ten-year returns, FUSEX actually outperformed VFINX over 10 years: 7.50% to 7.46%.
Schwab has an index fund too, SWPPX with a minimum investment of only $100. It returned 7.52% for ten years. This is the benchmark I should be using for comparing funds.
[6/5/13] Or how about an equal weight ETF like the Rydex S&P 500 Equal Weight ETF (RSP) which is commission free at Schwab. It has returned 9.50% for ten years compared to 7.33% for the S&P 500. SWPPX has returned 7.28%.
This would be good to switch to, when you think the largest cap stocks (currently AAPL and XOM are the largest) have run up too high. RSP rebalances quarterly. Which means they'll sell the largest weighted stocks at the end of the quarter. And buy the smallest. Their highest holding is currently First Solar FSLR, which has gone from about 27 to over 50 since the end of March.
[12/2/15] looking at equal weight since Roberts at chucks_angels has been writing about it] Then again, if you look back to 1990...
[12/2/15] Another alternative to cap-weighted index funds is the WisdomTree funds.
FDGFX's top holdings are AAPL, WFC, GOOG, C, PG, JNJ, PM, BRK.B. Which sounds fine to me.
FUSEX holds, naturally enough, 500 stock holdings with turnover of 4%. The top holdings are AAPL, XOM, MSFT, JNJ, CVX, GE, GOOG, IBM, PG, PFE, T, BRK.B, JPM, WFC, KO. Didn't realize that BRK.B is up there in the index.
Looking at the ten year returns of the Fidelity U.S. stock funds, FDGFX returned 6.66%, FDSSX 7.46%, FUSEX 7.81%, FCNTX 10.58%, FLPSX 12.31%. So I'd say it's the odd fund out.
Looking at the current ten-year returns, FUSEX actually outperformed VFINX over 10 years: 7.50% to 7.46%.
Schwab has an index fund too, SWPPX with a minimum investment of only $100. It returned 7.52% for ten years. This is the benchmark I should be using for comparing funds.
[6/5/13] Or how about an equal weight ETF like the Rydex S&P 500 Equal Weight ETF (RSP) which is commission free at Schwab. It has returned 9.50% for ten years compared to 7.33% for the S&P 500. SWPPX has returned 7.28%.
This would be good to switch to, when you think the largest cap stocks (currently AAPL and XOM are the largest) have run up too high. RSP rebalances quarterly. Which means they'll sell the largest weighted stocks at the end of the quarter. And buy the smallest. Their highest holding is currently First Solar FSLR, which has gone from about 27 to over 50 since the end of March.
[12/2/15] looking at equal weight since Roberts at chucks_angels has been writing about it] Then again, if you look back to 1990...
[12/2/15] Another alternative to cap-weighted index funds is the WisdomTree funds.
build wealth over time
successfully building wealth over time need not be an all-consuming,
overwhelming task. In fact, it does not require much more than simply
following a set of basic guidelines
1. pay yourself first
2. invest your savings smartly
3. build a portfolio you can stick to
and 7 more.
1. pay yourself first
2. invest your savings smartly
3. build a portfolio you can stick to
and 7 more.
Saturday, May 31, 2014
technical bull
There were several encouraging technical signs this week from a
bullish perspective. Let’s take a look at the major indices individually
and see where they stand this morning (May 30, 2014).
S&P 500 Index ($SPX):
Last Friday around this time the SPX was (once again) trading near the top of its recent trading range and it wasn’t entirely clear if it would break out or drop back down into that range. On Tuesday we got our answer as the SPX moved higher by 12 points and closed near the high of the day. After some consolidation of those gains on Wednesday, traders reinforced the price action breakout with some follow-though buying:
Dow Jones Industrial Average ($DJI):
The DJI chart may not be as bullish as the SPX because it didn’t record a new all-time high in concert with the SPX this week, but it appears to be above its old trading range and looks pretty healthy from my perspective. As of early Friday morning the DJI is down roughly 20 points and is about 50 points away from the all-time closing high it recorded back in mid-May
Russell 2000 ($RUT):
The breakout in the SPX appears to have prompted buying, and a corresponding breakout, in the RUT. If you are bullish it was both encouraging and significant to see the RUT breakout of its recent downtrend and validate the move in the SPX. The RUT has actually been outperforming the SPX recently as it has tacked on 3.5% since last Wednesday (vs. +2.5% for the SPX over the same time frame):
NASDAQ Composite ($COMPX):
Similar to the SPX and RUT, the COMPX broke out above the sideways range that it has been confined within since mid-April. The fact that the breakout in the SPX was accompanied with breakouts in both the RUT and COMPX this week is a good sign for the bulls:
Summary:
The bulls appear to be in control as markets finally break out of their respective trading ranges and resolve to the upside.
With markets trading near all-time highs I think it’s fairly safe to assume that the “Sell in May and go away” wasn’t the dominant investing philosophy this year.
S&P 500 Index ($SPX):
Last Friday around this time the SPX was (once again) trading near the top of its recent trading range and it wasn’t entirely clear if it would break out or drop back down into that range. On Tuesday we got our answer as the SPX moved higher by 12 points and closed near the high of the day. After some consolidation of those gains on Wednesday, traders reinforced the price action breakout with some follow-though buying:
Dow Jones Industrial Average ($DJI):
The DJI chart may not be as bullish as the SPX because it didn’t record a new all-time high in concert with the SPX this week, but it appears to be above its old trading range and looks pretty healthy from my perspective. As of early Friday morning the DJI is down roughly 20 points and is about 50 points away from the all-time closing high it recorded back in mid-May
Russell 2000 ($RUT):
The breakout in the SPX appears to have prompted buying, and a corresponding breakout, in the RUT. If you are bullish it was both encouraging and significant to see the RUT breakout of its recent downtrend and validate the move in the SPX. The RUT has actually been outperforming the SPX recently as it has tacked on 3.5% since last Wednesday (vs. +2.5% for the SPX over the same time frame):
NASDAQ Composite ($COMPX):
Similar to the SPX and RUT, the COMPX broke out above the sideways range that it has been confined within since mid-April. The fact that the breakout in the SPX was accompanied with breakouts in both the RUT and COMPX this week is a good sign for the bulls:
Summary:
The bulls appear to be in control as markets finally break out of their respective trading ranges and resolve to the upside.
With markets trading near all-time highs I think it’s fairly safe to assume that the “Sell in May and go away” wasn’t the dominant investing philosophy this year.
Friday, May 30, 2014
high quality or low quality?
aren't high-quality stocks superior to low-quality ones by
definition? The short answer: not in all market environments. For
example, the lowest-quality stocks tended to outperform the
highest-quality stocks when the U.S. economy was coming out
of recessions.
"There are times when you want to buy low-quality stocks because they've become very cheap," says Sudhir Nanda, head of the Quantitative Equity Group and manager of the Diversified Small-Cap Growth Fund. "In a recession, investors chase safe, defensive stocks; they become more expensive; and low quality becomes cheaper—and so low quality tends to do well coming off the bottom of a market cycle.
But over the long run, it pays to invest in high-quality stocks because you tend to have smaller down moves, so your returns can compound faster.
-- T. Rowe Price Report, Spring 2014
"There are times when you want to buy low-quality stocks because they've become very cheap," says Sudhir Nanda, head of the Quantitative Equity Group and manager of the Diversified Small-Cap Growth Fund. "In a recession, investors chase safe, defensive stocks; they become more expensive; and low quality becomes cheaper—and so low quality tends to do well coming off the bottom of a market cycle.
But over the long run, it pays to invest in high-quality stocks because you tend to have smaller down moves, so your returns can compound faster.
-- T. Rowe Price Report, Spring 2014
Thursday, May 29, 2014
try blind luck
Putting their alternative take on economics to the world of stock picking, "Freakonomics" authors Stephen Dubner and Steven Levitt have told CNBC that investors might try blind luck rather than follow the advice of their portfolio manager.
"We talk about the ability of experts to predict the future, whether the future is geopolitical or financial. And if you look at, let's say, stock picking advice specifically, you find that the experts, the people that we must revere, the people that we pay the most, are generally about as good as a monkey with a dart board," journalist Dubner told CNBC Thursday. "So if you're a buyer you have to consider what their incentives are, what their research says and how counter intuitive you can afford to be."
"We talk about the ability of experts to predict the future, whether the future is geopolitical or financial. And if you look at, let's say, stock picking advice specifically, you find that the experts, the people that we must revere, the people that we pay the most, are generally about as good as a monkey with a dart board," journalist Dubner told CNBC Thursday. "So if you're a buyer you have to consider what their incentives are, what their research says and how counter intuitive you can afford to be."
Monday, May 26, 2014
invert, always invert
[Looking at Poor Charlie's Almanack,] Charlie Munger is known for using the phrase Invert, Always Invert...
***
Charlie Munger, the business partner of Warren Buffett and Vice Chairman at Berkshire Hathaway, is famous for his quote “All I want to know is where I’m going to die, so I’ll never go there.” That thinking was inspired by Carl Gustav Jacob Jacobi, the German mathematician famous for some work on elliptic functions that I’ll never understand, who advised “man muss immer umkehren” (or loosely translated, “invert, always invert.”)
“(Jacobi) knew that it is in the nature of things that many hard problems are best solved when they are addressed backward,” Munger counsels.
While Jacobi applied this mostly to mathematics, the model is one of the most powerful thinking habits we need in our toolkit.
It is not enough to think about difficult problems one way. You need to think about them forwards and backwards. “Indeed,” says Munger, “many problems can’t be solved forward.”
Let’s take a look at some examples.
Say you want to create more innovation at your organization. Thinking forward, you’d think about all of the things you could do to foster innovation. If you look at the problem backwards, you’d think about all the things you could do to create less innovation. Ideally, you’d avoid those things. Sounds simple right? I bet your organization does some of those ‘stupid’ things today.
Another example, rather than think about what makes a good life, you can think about what prescriptions would ensure misery.
While both thinking forward and thinking backwards result in some action, you can think of them as additive vs. subtractive. And the difference is meaningful. Despite the best intentions, thinking forward increases the odds that you’ll cause harm (iatrogenics). Thinking backwards, call it subtractive avoidance, is less likely to cause harm.
Inverting the problem won’t always solve it, but it will help you avoid trouble. Call it the avoiding stupidity filter.
So what does this mean in practice?
Spend less time trying to be brilliant and more time trying to avoid obvious stupidity. The kicker? Avoiding stupidity is easier than seeking brilliance.
***
So what could cause a stock to crash? It might be overpriced and earnings dry up. So don't buy overpriced stocks. And don't buy stocks without a moat. [Thus, buy stocks with a moat at a reasonable price.]
***
Charlie Munger, the business partner of Warren Buffett and Vice Chairman at Berkshire Hathaway, is famous for his quote “All I want to know is where I’m going to die, so I’ll never go there.” That thinking was inspired by Carl Gustav Jacob Jacobi, the German mathematician famous for some work on elliptic functions that I’ll never understand, who advised “man muss immer umkehren” (or loosely translated, “invert, always invert.”)
“(Jacobi) knew that it is in the nature of things that many hard problems are best solved when they are addressed backward,” Munger counsels.
While Jacobi applied this mostly to mathematics, the model is one of the most powerful thinking habits we need in our toolkit.
It is not enough to think about difficult problems one way. You need to think about them forwards and backwards. “Indeed,” says Munger, “many problems can’t be solved forward.”
Let’s take a look at some examples.
Say you want to create more innovation at your organization. Thinking forward, you’d think about all of the things you could do to foster innovation. If you look at the problem backwards, you’d think about all the things you could do to create less innovation. Ideally, you’d avoid those things. Sounds simple right? I bet your organization does some of those ‘stupid’ things today.
Another example, rather than think about what makes a good life, you can think about what prescriptions would ensure misery.
While both thinking forward and thinking backwards result in some action, you can think of them as additive vs. subtractive. And the difference is meaningful. Despite the best intentions, thinking forward increases the odds that you’ll cause harm (iatrogenics). Thinking backwards, call it subtractive avoidance, is less likely to cause harm.
Inverting the problem won’t always solve it, but it will help you avoid trouble. Call it the avoiding stupidity filter.
So what does this mean in practice?
Spend less time trying to be brilliant and more time trying to avoid obvious stupidity. The kicker? Avoiding stupidity is easier than seeking brilliance.
***
So what could cause a stock to crash? It might be overpriced and earnings dry up. So don't buy overpriced stocks. And don't buy stocks without a moat. [Thus, buy stocks with a moat at a reasonable price.]
Sunday, May 25, 2014
down to 330 million
Bill Gates, the former chief executive
and chairman of Microsoft Corp, will have no direct ownership in the
company he co-founded by mid-2018 if he keeps up his recent share sales.
Gates, who started the company that revolutionized personal computing with school-friend Paul Allen in 1975, has sold 20 million shares each quarter for most of the last dozen years under a pre-set trading plan.
Assuming no change to that pattern, Gates will have no direct ownership of Microsoft shares at all four years from now.
With his latest sales this week, Gates was finally eclipsed as Microsoft's largest individual shareholder by the company's other former CEO, Steve Ballmer, who retired in February, but has held on to his stock.
According to documents filed with the U.S. Securities and Exchange Commission on Friday, Gates now owns just over 330 million Microsoft shares after the sales this week. Ballmer owns just over 333 million, according to Thomson Reuters data.
That gives both men around 4 percent each of the total outstanding shares, making them by far the biggest individual shareholders. Fund firms The Vanguard Group, State Street Global Advisors and BlackRock have slightly bigger stakes, according to Thomson Reuters data.
Spokesmen for Gates and Microsoft declined comment.
Gates owned 49 percent of Microsoft at its initial public offering in 1986, which made him an instant multi-millionaire. With Microsoft's explosive growth, he soon became the world's richest person, and retains that title with a fortune of about $77 billion today, according to Forbes magazine.
Gates handed the CEO role to Ballmer in 2000, and stood down as chairman in February. He remains on the board and spends about a third of his time as technology adviser to new Microsoft CEO Satya Nadella.
For the past six years, his focus has been on philanthropy at the Bill & Melinda Gates Foundation, which is largely funded by his Microsoft fortune.
***
Let's see. 330 million times Microsoft's price of $40.12 = $13.2 billion. Gates is worth $76 billion. So what's the other $63 billion in? Gurufocus lists the Bill & Melinda Gates Trust as being worth about $20 billion. And almost half of it is in Berkshire Hathaway stock. I don't know that the Trust counts toward his net worth (I wouldn't think so), but even if it does, that leaves $43 billion. So where's the rest? Ah, Cascade Investment, LLC. But according to this, Cascade was managing only $500 million a couple of years ago. Here's wikipedia's entry.
Gates, who started the company that revolutionized personal computing with school-friend Paul Allen in 1975, has sold 20 million shares each quarter for most of the last dozen years under a pre-set trading plan.
Assuming no change to that pattern, Gates will have no direct ownership of Microsoft shares at all four years from now.
With his latest sales this week, Gates was finally eclipsed as Microsoft's largest individual shareholder by the company's other former CEO, Steve Ballmer, who retired in February, but has held on to his stock.
According to documents filed with the U.S. Securities and Exchange Commission on Friday, Gates now owns just over 330 million Microsoft shares after the sales this week. Ballmer owns just over 333 million, according to Thomson Reuters data.
That gives both men around 4 percent each of the total outstanding shares, making them by far the biggest individual shareholders. Fund firms The Vanguard Group, State Street Global Advisors and BlackRock have slightly bigger stakes, according to Thomson Reuters data.
Spokesmen for Gates and Microsoft declined comment.
Gates owned 49 percent of Microsoft at its initial public offering in 1986, which made him an instant multi-millionaire. With Microsoft's explosive growth, he soon became the world's richest person, and retains that title with a fortune of about $77 billion today, according to Forbes magazine.
Gates handed the CEO role to Ballmer in 2000, and stood down as chairman in February. He remains on the board and spends about a third of his time as technology adviser to new Microsoft CEO Satya Nadella.
For the past six years, his focus has been on philanthropy at the Bill & Melinda Gates Foundation, which is largely funded by his Microsoft fortune.
***
Let's see. 330 million times Microsoft's price of $40.12 = $13.2 billion. Gates is worth $76 billion. So what's the other $63 billion in? Gurufocus lists the Bill & Melinda Gates Trust as being worth about $20 billion. And almost half of it is in Berkshire Hathaway stock. I don't know that the Trust counts toward his net worth (I wouldn't think so), but even if it does, that leaves $43 billion. So where's the rest? Ah, Cascade Investment, LLC. But according to this, Cascade was managing only $500 million a couple of years ago. Here's wikipedia's entry.
too easy?
Here is the chart of McDonald’s PE during the past 10 years:
If you know the business really well, do you have to be a genius to find out that it’s cheap at 13 time forward earnings? And if you have the right temperament, is it that hard to buy something that you know is cheap? And if you buy it cheap, is it unreasonable that you outperform the market?
The above may sound too easy to be true. Yet I can guarantee only a handful investors can do that. In investing, the simplest thing are often the hardest to do.
If you know the business really well, do you have to be a genius to find out that it’s cheap at 13 time forward earnings? And if you have the right temperament, is it that hard to buy something that you know is cheap? And if you buy it cheap, is it unreasonable that you outperform the market?
The above may sound too easy to be true. Yet I can guarantee only a handful investors can do that. In investing, the simplest thing are often the hardest to do.
Friday, May 16, 2014
7 top technical analysts
My first brush with Technical Analysis was not a good one and I was left asking the question “Does Technical Analysis work?”. There was plenty of evidence to suggest Fundamental Analysis worked (Warren Buffett has Billions of evidence). But Fundamental Analysis really doesn’t suit my personality so what were the other options?
Everywhere you go online there is another guru selling the latest TA system accompanied with confusing looking charts. I decided that if there wasn’t a long list of very rich Technical Analysts out there then I had lost enough money using TA and was ready to quit. To my delight I discovered many successful traders and investors who had the track record to prove that Technical Analysis does work. Here is a list of the traders I found particularly noteworthy.
Everywhere you go online there is another guru selling the latest TA system accompanied with confusing looking charts. I decided that if there wasn’t a long list of very rich Technical Analysts out there then I had lost enough money using TA and was ready to quit. To my delight I discovered many successful traders and investors who had the track record to prove that Technical Analysis does work. Here is a list of the traders I found particularly noteworthy.
Thursday, May 15, 2014
David Tepper is nervous
FORTUNE -- The nation's highest paid hedge fund manager is concerned about the market.
"There are times to make money," says David Tepper, who runs Appaloosa Management. "This is a time to not lose money. I think it is a nervous time."
On Wednesday, Tepper cautioned fellow fund managers and other attendees of this year's SALT Investing Conference in Las Vegas. Tepper, who rarely talks about the market publicly, was recently named the highest paid hedge fund manager by Institutional Investor's Alpha magazine. The magazine said he made $3.5 billion last year.
Tepper's biggest concerns hinge on economic growth prospects and its effect on stock prices. He said his opinion would be different if the economy was growing at 4%. But he said that, even adjusting for the weather, the economy looks to be growing much more slowly than he expected. Indeed, U.S. GDP grew by 0.1% in the first quarter of 2014.
That's a problem, Tepper says, because stocks on average are trading at 16 times next year's expected earnings. That means investors are expecting relatively strong bottom lines. But if the economy is growing more slowly than expected, profits are likely to disappoint.
Tepper says he is also concerned about deflation, given the sluggish economic growth prospects. "If we have price pressure as well, then that's really going to push down profits," says Tepper.
Tepper says that while he is normally seen as a bullish investor, he currently has a portion of his money in cash. "I'm not saying go short," Tepper says, which is the Wall Street term for betting against the market. "But don't be super long either."
"There are times to make money," says David Tepper, who runs Appaloosa Management. "This is a time to not lose money. I think it is a nervous time."
On Wednesday, Tepper cautioned fellow fund managers and other attendees of this year's SALT Investing Conference in Las Vegas. Tepper, who rarely talks about the market publicly, was recently named the highest paid hedge fund manager by Institutional Investor's Alpha magazine. The magazine said he made $3.5 billion last year.
Tepper's biggest concerns hinge on economic growth prospects and its effect on stock prices. He said his opinion would be different if the economy was growing at 4%. But he said that, even adjusting for the weather, the economy looks to be growing much more slowly than he expected. Indeed, U.S. GDP grew by 0.1% in the first quarter of 2014.
That's a problem, Tepper says, because stocks on average are trading at 16 times next year's expected earnings. That means investors are expecting relatively strong bottom lines. But if the economy is growing more slowly than expected, profits are likely to disappoint.
Tepper says he is also concerned about deflation, given the sluggish economic growth prospects. "If we have price pressure as well, then that's really going to push down profits," says Tepper.
Tepper says that while he is normally seen as a bullish investor, he currently has a portion of his money in cash. "I'm not saying go short," Tepper says, which is the Wall Street term for betting against the market. "But don't be super long either."
Wednesday, May 14, 2014
Giants that have disappeared
The business landscape has changed significantly in the past 25 years — not only in how we work but also with whom we work.
It's sometimes easy to forget that king of the hill isn't a permanent position, and companies that seem invincible might not be around forever in their current form — or, in some cases, any form.
Even icons fall. Click through these pages for a look at five names we took for granted in 1989 that have since faded away.
It's sometimes easy to forget that king of the hill isn't a permanent position, and companies that seem invincible might not be around forever in their current form — or, in some cases, any form.
Even icons fall. Click through these pages for a look at five names we took for granted in 1989 that have since faded away.
Tuesday, May 13, 2014
Dow propelled by one stock
The Dow Jones Industrial Average is at record highs and it's mostly because of just one of its components.
Caterpillar is doing a lot of heavy lifting when it comes to moving the Dow index, a huge change from last year when it was up just 1 measly percent against the Dow's 26 percent gain.
Though it's just 4 percent of the entire average, the equipment maker is up nearly 17 percent this year. To put it in perspective, Caterpillar accounts for more than half of the entire Dow's gains. And, were it not for Caterpillar, Merck and Disney, the Dow would be down in 2014.
Monday, May 12, 2014
the game hasn't changed
"The game hasn't really changed," Buffett continued. "The whole idea in
investing is to buy into good businesses and if the business does well,
you do well in investing -- if you don't pay too much. That was true 25
years ago and it will be true 25 years from now."
*** 5/16/14
A few years ago, Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) CEO and Chairman Warren Buffett spoke about one of his favorite companies, Coca-Cola (NYSE: KO), and how after dividends, stock splits, and patient reinvestment, someone who bought just $40 worth of the company's stock when it went public in 1919 would now have more than $5 million.
Yet in April 2012, when the board of directors proposed a stock split of the beloved soft-drink manufacturer, that figure was updated and the company noted that original $40 would now be worth $9.8 million. A little back-of-the-envelope math of the total return of Coke since May 2012 would mean that $9.8 million is now worth about $10.8 million.
The power of patience
I know that $40 in 1919 is very different from $40 today. However, even after factoring for inflation, it turns out to be $540 in today's money. Put differently, would you rather have an Xbox One, or almost $11 million?
But the thing is, it isn't even as though an investment in Coca-Cola was a no-brainer at that point, or in the near century since then. Sugar prices were rising. World War I had just ended a year prior. The Great Depression happened a few years later. World War II resulted in sugar rationing. And there have been countless other things over the past 100 years that would cause someone to question whether their money should be in stocks, much less one of a consumer-goods company like Coca-Cola.
The dangers of timing
Yet as Buffett has noted continually, it's terribly dangerous to attempt to time the market:
This type of technical analysis of watching stock movements and buying based on how the prices fluctuate over 200-day moving averages or other seemingly arbitrary fluctuations often receives a lot of media attention, but it has been proved to simply be no better than random chance.
Investing for the long term
Individuals need to see that investing is not like placing a wager on the 49ers to cover the spread against the Panthers, but instead it's buying a tangible piece of a business.
It is absolutely important to understand the relative price you are paying for that business, but what isn't important is attempting to understand whether you're buying in at the "right time," as that is so often just an arbitrary imagination.
In Buffett's own words, "if you're right about the business, you'll make a lot of money," so don't bother about attempting to buy stocks based on how their stock charts have looked over the past 200 days. Instead always remember that "it's far better to buy a wonderful company at a fair price."
*** 5/16/14
A few years ago, Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) CEO and Chairman Warren Buffett spoke about one of his favorite companies, Coca-Cola (NYSE: KO), and how after dividends, stock splits, and patient reinvestment, someone who bought just $40 worth of the company's stock when it went public in 1919 would now have more than $5 million.
Yet in April 2012, when the board of directors proposed a stock split of the beloved soft-drink manufacturer, that figure was updated and the company noted that original $40 would now be worth $9.8 million. A little back-of-the-envelope math of the total return of Coke since May 2012 would mean that $9.8 million is now worth about $10.8 million.
The power of patience
I know that $40 in 1919 is very different from $40 today. However, even after factoring for inflation, it turns out to be $540 in today's money. Put differently, would you rather have an Xbox One, or almost $11 million?
But the thing is, it isn't even as though an investment in Coca-Cola was a no-brainer at that point, or in the near century since then. Sugar prices were rising. World War I had just ended a year prior. The Great Depression happened a few years later. World War II resulted in sugar rationing. And there have been countless other things over the past 100 years that would cause someone to question whether their money should be in stocks, much less one of a consumer-goods company like Coca-Cola.
The dangers of timing
Yet as Buffett has noted continually, it's terribly dangerous to attempt to time the market:
"With a wonderful business, you can figure out what will happen; you can't figure out when it will happen. You don't want to focus on when, you want to focus on what. If you're right about what, you don't have to worry about when"So often investors are told they must attempt to time the market, and begin investing when the market is on the rise, and sell when the market is falling.
This type of technical analysis of watching stock movements and buying based on how the prices fluctuate over 200-day moving averages or other seemingly arbitrary fluctuations often receives a lot of media attention, but it has been proved to simply be no better than random chance.
Investing for the long term
Individuals need to see that investing is not like placing a wager on the 49ers to cover the spread against the Panthers, but instead it's buying a tangible piece of a business.
It is absolutely important to understand the relative price you are paying for that business, but what isn't important is attempting to understand whether you're buying in at the "right time," as that is so often just an arbitrary imagination.
In Buffett's own words, "if you're right about the business, you'll make a lot of money," so don't bother about attempting to buy stocks based on how their stock charts have looked over the past 200 days. Instead always remember that "it's far better to buy a wonderful company at a fair price."
Wednesday, May 07, 2014
SOYA investing
most people don't do what Buffett does, which is primarily buy into good, solid companies and then sit on his butt
"All intelligent investing is value investing - to acquire more than you are paying for. Investing is where you find a few great companies and then sit on your ass. - Charlie Munger at Berkshire Hathaway's 2000 Shareholder Meeting
Related articles
99% of Long-Term Investing Is Doing Nothing
My Investment Advice: Do Nothing!
[see also time horizon: long-term vs. short-term thinking]
"All intelligent investing is value investing - to acquire more than you are paying for. Investing is where you find a few great companies and then sit on your ass. - Charlie Munger at Berkshire Hathaway's 2000 Shareholder Meeting
Related articles
99% of Long-Term Investing Is Doing Nothing
My Investment Advice: Do Nothing!
[see also time horizon: long-term vs. short-term thinking]
Tuesday, May 06, 2014
millionaire survey says...
In the heated debate over inequality, the wealthy are usually portrayed as the cause rather than the solution.
But CNBC's
first-ever Millionaire Survey reveals that 51 percent of American
millionaires believe inequality is a "major problem" for the U.S., and
nearly two-thirds support higher taxes on the wealthy and a higher
minimum wage as ways to narrow the wealth gap.
The
findings show that-far from being a purely self-interested voting
bloc-American millionaires have complicated views when it comes to the
wealth gap and opportunity in America. They are unashamed of their own
wealth and attribute their success to hard work, smart investing and
savings. They also believe that anyone in America can get wealthy if
they work hard.
Yet
millionaires also believe that cultural and family issues prevent many
Americans from climbing the wealth ladder. They advocate improved
education, higher taxes on the wealthy and better savings incentives for
the poor and middle class as important changes that would reduce
inequality.
The CNBC Millionaire Survey polled 514 people with investable assets of $1 million or more, which represents the top 8 percent of American households. The respondents came from around the country and were split between Democrats, Republicans and Independents.
The online survey was conducted in March by Spectrem Group on behalf of CNBC.
When asked about the No. 1 factor in obtaining their wealth, the millionaires ranked hard work first (23 percent), followed by smart investing (21 percent) and savings (18 percent). Education ranked fourth, at 10 percent, followed by frugality and then inheritance. Only 1 percent cited luck as the top reason for their wealth.
Multimillionaires, or people worth $5 million or more, were more likely to cite "running my own business" as their top wealth factor. Women were three times more likely to cite inheritance as their top wealth factor (15 percent vs. 5 percent for men), while men were more likely to cite savings (20 percent vs. 14 percent for women).
Most millionaires still believe in the American dream. Fully 94 percent said the American dream is achievable. When asked to define that dream, the largest number (45 percent) said the American dream is "prosperity and upward mobility through hard work." Only 18 percent defined it as "spiritual and temporal happiness more than material goods." Multimillionaires, however, were far more likely to define the dream as material rather than spiritual (63 percent vs. 4 percent).
Despite being winners in the new economy, U.S. millionaires view inequality as a problem. More than half of millionaires and multimillionaires agreed that "inequality of wealth in our nation is a major problem."
Yet they don't see themselves as a cause. Fully 81 percent said they don't feel embarrassed by their wealth, "because I earned it," and only 5 percent said they feel a sense of guilt about the wealth they possess. More than half said anyone in the U.S. can become wealthy if they work hard.
When asked about the reasons for inequality, most (78 percent) said the wealthy have greater access to education. Two-thirds cited that the "lack of financial literacy" prevents poor households from making better financial decisions.
More than half said cultural issues and broken families also prevent people from attaining wealth. Only 6 percent said that people worth less do not work as hard as those with wealth.
The best way to reduce inequality, millionaires say, is through improved education. Fully 83 percent supported an increase in educational opportunities for the less wealthy. An equal number (64 percent) supported better savings incentives for the less wealthy and higher taxes for the wealthy.
Perhaps surprisingly, a majority (63 percent) also support a minimum wage. Only 13 percent supported reducing unemployment benefits to encourage more work as a solution to inequality.
A millionaire's view on inequality and taxes, however, seems to depend more on their politics than their wealth. Eighty-six percent of Democratic millionaires said inequality is a problem, compared with only 20 percent of Republicans. Two-thirds of Republicans vs. a quarter of Democrats say anyone can become wealthy in America if they work hard.
Democratic millionaires are far more supportive of taxing the rich and raising the minimum wage. Among Democratic millionaires, 78 percent support higher taxes on the wealthy, and 77 percent back a higher minimum wage. That compares with 31 percent and 38 percent, respectively, for Republicans.
Politics even plays a role in how millionaires view wealth creation. Among Republican millionaires,63 percent say hard work is the No. 1 reason the wealthy are wealthy. Democrats were most likely (45 percent) to cite a person's family or place of birth as the top reason for their wealth.
The bottom line: American millionaires, in general, agree that inequality is a problem. But when it comes to solutions, millionaires are just as split along political lines as the rest of the country.
*** 5/10/14 ***
Mitt Romney supports raising the minimum wage
*** 5/10/14 ***
Mitt Romney supports raising the minimum wage
Sunday, May 04, 2014
stocks to hold forever
Few people realize these stocks even exist.
But many of the richest, most successful investors, politicians and businessmen have been quietly cashing in on them for decades.
Watch the 90-second video below to see how you can too...
***
Elliott Gue will be a familiar name to longtime Gumshoe readers — he’s been a fixture in newsletter land for as long as we’ve been around (Stock Gumshoe’s sixth birthday was a couple months ago, thanks very much), and he’s got a new home. He ran the venerable Personal Finance letter for a while and built a bit of a name for himself as an energy investing specialist at Energy Strategist before leaving that publisher and signing on with StreetAuthority.
And now Gue is headlining several letters for StreetAuthority, including the StreetAuthority Top Ten Stocks letter that tries to pick out favorite ideas from all the other letters at that publisher. Several of the publishers have these “best of the best” newsletters, and they’re usually treated as inexpensive ways to get people introduced to the letters (and hopefully drive them to “upgrade” to subscriptions to the more expensive services they offer).
But that doesn’t mean they’re not useful or interesting, of course — and one of the ways they’ve pitched this service in the past, back when it was still helmed by founder Paul Tracy, was by teasing a list of their favorite “forever” stocks that you can buy and hold, well, forever. So whenever they trot out this teaser campaign, as they’ve just done under Gue’s signature, I like to have a look.
Why? Well, partly because lots of readers ask about these — and partly because, frankly, buying solid stocks of this ilk and holding for a long time is probably still the easiest way for an investor to do well without great expertise or a big time commitment. The average holding period for stocks is probably down to just a month or two now, maybe less, and that means a lot of individual investors are trying to time little market moves and are probably, on average, failing to keep up with the market — and paying higher commissions and taxes along the way.
I can’t get up here and tell you that “buy and hold” is the best or only strategy for everyone, of course, and it’s not the only strategy I pursue … but buying great companies and holding for many, many years — preferably with a nice, compounding dividend stream that lets the investment grow even faster — has worked better for me, more often, than most of the other strategies I use.
As in past iterations, they “give away” the top two names for free — the first is what Elliott Gue calls his favorite “Rockefeller Stock,” Brookfield Infrastructure Partners (BIP). That’s a publicly traded partnership that owns infrastructure assets, including a lot of utility assets (transmission lines, pipelines, connections) and transportation assets (railroad, toll road, ports), among other things (including a lot of timberland). The stock has been extraordinarily successful coming out of the financial crisis, with a very price appreciation and a solid and slowly growing 4.5% distribution yield.
This is one of those stocks that I’ve missed by always hoping it would get a bit cheaper — if rates rise considerably, it will be hurt, but they do own very valuable and long-lived assets, with regulated payouts, so that’s mostly just an interest rate risk (if you can buy a “safe” bond for 6% yield at some point in the future, the 4.5% yield from BIP will look less impressive).
And the second “freebie” is Google (GOOG). I have owned this one almost “forever” myself (I started buying about six months after the IPO and haven’t ever sold any), and if you can’t formulate an opinion on it for yourself it’s not for a lack of information — I consider Google one of the key utilities of the information age, and increasingly the most important advertising company in history. It’s not cheap anymore, but it shouldn’t have ever been cheap — adjusted for their huge cash balance they trade, on an earnings valuation, as pretty much an average S&P 500 Company. They’re far better than average, and they’re still growing nicely.
Then we get into the teasers …
“‘Forever’ Stock #3 is the most shareholder-friendly company I’ve ever seen. It has raised its dividend 84.8% since 2008… and has bought back 432 million of its own shares (about 20% of all shares outstanding). That’s one reason why earnings per share jumped 20% in 2011 and 6% in 2012. Buy it now and you’ll lock in a solid yield of about 4% (and I expect another dividend increase in the next few quarters). Meanwhile, the company plans billions more in share repurchases this year, which should support the stock price in just about any market.”
That one’s Philip Morris International (PM), the global tobacco company. Yield is down to about 3.6% now thanks to a rising share price, but they have increased the dividend 84.8% since they split from Altria in 2008 (46 cents/quarter to 85 cents/quarter), and they probably will keep raising the dividend and buying back more shares — the debt is low and the payout ratio is low (they pay out 64% of earnings as dividends), so it should be pretty stable. I don’t buy tobacco stocks for personal reasons, but most of them have been excellent income investments over the past decade or more — when Jeremy Siegel looked at the best stock market returns from 1925 to the present, Philip Morris (the original, combined company before the Altria-PM split) was number one, thanks largely to the many decades of reinvesting those dividends.
Next!
“‘Forever Stock’ #4 is a fund with a simple mission — to buy stakes in the most stable utility companies on the earth and pay investors a fat dividend yield. It owns telecoms in Israel, electric companies in Brazil, and water utilities in the United States. It’s returned 11% per year since its inception in 2004… and it has boosted its dividend 28.9% along the way. In total, the fund has paid more than 100 consecutive dividends and currently yields 6.0%. But don’t expect to have heard of this one… it trades only 100,000 shares a day — about what Apple trades in two minutes.”
This one they’ve teased in previous lists, it’s the Reaves Utility Income Fund (UTG), a closed-end fund that holds utilities and uses leverage to boost their returns — they include telecoms in their definition of “utilities”, so you’ll see both Verizon and AT&T in their top holdings alongside familiar utilities like Duke Energy or Entergy, but they have indeed returned an annualized 11% a year since 2004. The fund has actually done better than that on a net asset value basis (12% annual return), but the typical closed-end fund discount means that actual shareholders have gotten an 11% average annual return.
Right now, with folks getting a bit concerned about utilities as they watch the Fed’s chatter about possible interest rate increases, the shares are down a bit and the fund is trading again at a decent discount to net asset value. Right now, you can buy shares at about a 5% discount to the net asset value, and the yield is about 6%, with a monthly payout of 13 cents. You can see their full profile at CEF Connect here.
You can also, if you don’t want to go “forever,” go riskier and higher-yield with utility closed-end funds with, for example, the Gabelli Utility Trust (GUT), but some of the higher yield on that one comes from return of capital — and that particular fund has fallen by more than 25% over the past year even as the net asset value has risen because investors have bumped it down from a huge and ridiculous 50% premium to NAV to a still-high 13% premium. Or go more mainstream with an ETF like the Utilities Select SPDR (XLU), but that gets you a yield below 4%. Utilities are worrisome when investors start to see rising rates in the future, so be mindful that even solid companies that will be needed forever can go down in price if they’re valued by investors based on their dividend yield, as most utilities are, and the interest rate universe changes around them. I’d definitely buy a fund before I bought an individual utility, but I don’t need current income from this sector so I’m just as happy letting Warren Buffett build up his Berkshire Hathaway (BRK-B) utility holdings on my behalf.
Next!
“‘Forever Stock’ #5 was founded in 1966, but you couldn’t buy a stake until six years ago. Since it’s gone public, the stock is up 1,079% thanks to its seemingly unstoppable growth. Maybe that’s what attracted the world’s greatest investor– Warren Buffett– and his investment team. His giant investment firm, Berkshire Hathaway, bought a 216,000 share stake in this ‘Forever’ stock in 2011. And then Berkshire doubled down — buying 189,000 more shares the next quarter.”
This one is MasterCard (MA). Dammit. Every time I see this stock I’m reminded of not having bought it years ago because I was wary of the price. Turns out, a duopoly with a rapidly growing global clientele can be a great buy even when it’s not clearly cheap — I didn’t buy MA when it was at $100, and though it’s not cheap at the moment it might not ever be cheap, you can certainly argue that the valuation is fair with a forward PE of 19 and a near-$600 share price. I might slightly prefer the larger Visa (V) at current prices, but it’s a close call and both are hugely profitable behemoths who will probably continue to rule the world of plastic and electronic payments. Both pay dividends that are almost criminally small, but both are also growing their dividend rapidly.
“Forever Stock #6 tracks an index that has returned 396% over the past 10 years. It does so well because it holds dozens of energy partnerships that are legally bound to pay out the bulk of their cash flow to investors. Best of all, most of these businesses pay zero corporate tax.”
This one looks like it’s a repeat, the “Forever Stock #6″ back in 2011 was teased similarly and they offered more clues that time, so unless they’ve switched to a different fund of master limited partnerships (MLPs) this should be the JP Morgan Alerian MLP Index ETN (AMJ). That’s an Exchange Traded Note, not an Exchange Traded Fund, so it’s a JP Morgan debt instrument that they promise will track the returns of the Alerian index of mostly pipeline and midstream MLPs.
There are also ETFs and closed-end funds that track MLPs. Over the past year the AMJ ETN has done considerably better than the most widely-followed ETF, ticker AMLP — partly because JP Morgan halted creation of new units of this ETN because it was getting so big, so it’s now trading at a premium to its actual value now, and partly because ETNs don’t pay taxes like the ETFs do. So AMJ now has an effective yield of about 4.5%, and AMLP yields closer to 6%, based on effectively the same underlying portfolio and same management fee. Given that, if you want the ETN structure I’d be a bit wary of giant AMJ and consider one of the newer ETNs that is not self-limited and probably isn’t trading at a premium, like AMU from UBS, but I have not double checked the current state of that one. Buying any ETF or ETN to get your MLP exposure basically means you give up some of the tax-deferral advantage of MLP ownership in exchange for some diversification and the absence of those dreaded (by some) K-1 forms for partnership unitholders.
“‘Forever’ Stock #7 is a fund that holds 280 fast-growing companies in emerging markets like Taiwan, Brazil and Malaysia. At first glance you might think that’s risky… until you realize that these economies are growing 2X and 3X faster than ours. This ‘Forever’ idea is a superb way to profit from that fact. Meanwhile, you get a yield close to 4% — surprisingly generous for stocks with such explosive potential.”
I’ll wager that this is another copy-and-paste from their last “forever” list, and that time I guesstimated that this was the WisdomTree Emerging Markets Equity ETF (DEM), which does still yield better than 3% (3.3% at the moment, according to Yahoo Finance), and it has tracked the broader emerging markets ETF (EEM) almost exactly over the past two years while payout out a dividend yield that’s twice as high. That dividend focus means they have big exposure to energy/commodities and banks, which is not unusual for an emerging markets fund — Gazprom, Vale, Lukoil and a few Chinese banks are in their top ten holdings. EEM is far more diversified, for sure (largest holding is Samsung, they index by market cap, not by dividend yield), and has done better than DEM over the past year, but since DEM’s inception about five years ago it has edged out EEM.
“Every $1,000 you invested in “Forever” Stock #8 back in 1972 would be worth a stunning $2,030,000 today. Maybe that’s why it’s one of Congress’ favorite “sweetheart” stocks. In total, more than 50 members of Congress own a stake. All the big banks own a piece of this company, too. Morgan Stanley owns 31 million shares. JPMorgan Chase owns 32 million. Bank of America owns 37 million. And Goldman Sachs owns over 13 million shares of this stock.
“Meanwhile, the company is raising its dividend, spending billions to buy back its own shares, making smart acquisitions, and according to investment research firm Morningstar, owns an ’80% stranglehold on a $30 billion market…’”
This one is Intel (INTC), another stock that I own and am delighted to allow to compound in my portfolio — they get beaten down from time to time as fears rise about the soft PC market, but I wouldn’t bet against Intel’s unmatched manufacturing capacity or their ability to pound their way into the growing mobile market, and they still make lots of money on PC and server chips even if the speed of the collapse of the personal computer business has really shocked most of the players. I’ve built my personal position in Intel over the last couple years with buys between $20-$23, and bought most recently back in March. I don’t know if it will be a forever stock for me, but I think investors are over-worrying when it comes to this dominant company and I like watching those new shares compound and grow my account every few months.
“I like to call ‘Forever’ Stock #9 ‘Baby Berkshire.’ It invests just like Warren Buffett’s Berkshire Hathaway, but there is one major difference…
“This company is still small enough to make nearly any investment it wants, which frees it up to short for big returns. Warren Buffett himself said of his company, ‘Berkshire’s capital base is now simply too large to allow us to earn truly outsized returns.’
“House Majority Leader Eric Cantor (R-VA) owns at least $100,000 of this stock… and for good reason. From its low in March 2009, the shares have more than doubled.”
Looks like this is another repeat and another personal favorite, Markel (MKL), the specialty insurer that does often get compared to Berkshire Hathaway and which just closed a company-changing acquisition of Alterra to almost double their size. Markel is a great company, it was an extraordinarily easy buy when it collapsed on the announcement of the Alterra bid, and I bought some then and wrote about it for the Irregulars (it jumped up to be of my top five holdings this year). There’s still a possibility that the integration of the companies will be trickier and hurt earnings or book value, particularly if Markel wants to increase reserves on the Alterra business to match its more conservative profile, or is slow to adjust Alterra’s portfolio, so I’m trying to be patient and wait for a possible a dip in the stock when they announce their first couple consolidated quarters later this year — but, to be honest, I’ve considered adding to my position recently even without a dip, just because Markel’s more flexible investing mandate tied to Alterra’s now bond-dominated portfolio could generate dramatic performance improvement over the next few years.
And finally, number 10:
“I looked all the way to South America for ‘Forever’ Stock #10, but don’t worry… it trades right on the New York Stock Exchange.
“It’s the largest electricity company in Brazil, boasting more than 7 million customers. Like many utilities, its profits are driven by its monopolistic position. It sells three-quarters of its total power to captive customers who can’t switch to another supplier.
“Meanwhile, the company makes the point of distributing at least 50% of its income to shareholders… good now for a very safe yield of 7.0%.”
Similar picks have been teased by the StreetAuthority folks several times over the last couple years, and the two likely picks are the two largest NY-traded Brazilian electric utilities, CPFL Energia (CPL) and Companhia Energetica de Minas Gerais (CIG). CPFL has been a bit steadier and pays closer to a 7% yield (it would be 7% based on the 2012 dividends and the current share price, though the initial 2013 dividend paid just last month trended lower). Brazilian utilities are having some trouble with regulation and haven’t been able to get pricing increases — in many cases they’ve seen rate cuts as the government wants to lower costs for users — so the regulatory environment might not be as steady as we typically see for US utilities. Both have more than seven million customers and both do generation, transmission and delivery of electricity to end users, though concentrated in different states (CIG in Minas Gerais, CPL in Sao Paolo and Rio Grande do Sul — all three are among the most populous and developed states in Brazil).
So there you have it — not a lot of new names for you, but a reiteration under new editor Elliott Gue that they’ve got ten “forever” stocks to build a future on.
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Hey, here's the secret report! (stockgumshoe went 10 for 10.)
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Forbe's five stocks to hold forever.
So how do you know which stocks are “buy and hold forever” stocks and which are at risk of going the way of BlackBerry or Penney? There are no rules that are guaranteed to work 100% of the time, but these guidelines will get you close:
So how do you know which stocks are “buy and hold forever” stocks and which are at risk of going the way of BlackBerry or Penney? There are no rules that are guaranteed to work 100% of the time, but these guidelines will get you close:
Likewise, because they are by nature highly-leveraged and subject to macro shocks, banks are a no-go on the buy-and-hold-forever list. And finally, JC Penney is a warning to all retailers, even well-managed ones like Wal-Mart and Target. Penney was once an innovative leader too; its catalogue business was the precursor to online shopping as we know it today. Wal-Mart and Target were the disruptors that wrecked Penney’s business. And unless they continue to adapt to fend off competition from Amazon.com, they will eventually succumb to Penney’s fate as well.
The five? Diageo, Unilever, Heineken, Realty Income, Nestle.
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Kiplinger's 7 blue chips to hold forever
You need courage to buy stocks nowadays. The market's turbulent start in 2009, coming on the heels of 2008's awful beating, hardly leaves investors feeling warm and fuzzy. The economy is in a deep slump, and the outlook for corporate earnings over the next few quarters is somewhere between murky and miserable.
How do you invest in stocks in the midst of so much turmoil and uncertainty? We suggest you focus on the long term -- say, a minimum of seven years -- and look for high-quality, blue-chip companies that have balance sheets as invulnerable as Fort Knox and can generate wads of cash.
Our thinking goes like this. It will take several years for consumers, the economy and the financial system to recuperate fully. Economic growth and therefore earnings growth are likely to be tepid over the next five or more years. But if you invest in well-managed, financially strong businesses that sell goods and services for which demand is consistently strong (think food and medicine, not arcane financial products), you should do well.
Businesses like these typically display certain characteristics: They carry little or no debt. They generate enough free cash flow (earnings plus depreciation and other noncash charges, minus the capital outlays needed to maintain the business) that they don't have to raise equity or sell debt -- a good thing in today's unfriendly capital markets. They have a proven history of management excellence. They have abundant opportunities for reinvesting capital (or clear policies for returning excess capital to shareholders), and their leaders boast an outstanding record of allocating capital. In addition, they are global in scope. After all, 95% of the world's population lives outside the U.S., and economic growth is likely to be greater abroad than at home.
We suggest that you focus on companies that pay out some of their profits; in a sluggish economic environment, much of your total return will come from reinvested dividends. Judy Saryan, co-manager of Eaton Vance Dividend Builder fund, notes that over the long haul, 40% to 45% of the return on stocks has come from reinvested dividends, a share she reckons will climb to 50% over the next five to ten years.
The seven: Philip Morris (PM), Nestle (NSRGY.PK), McDonald's (MCD), Monsanto (MON), ExxonMobil (XOM), Teva Pharmaceutical Industries (TEVA), IBM (IBM).
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From Lawrence Meyers, three stocks to buy and hold forever.
There’s a certain category of stocks that I consider stocks to buy and hold until the zombie apocalypse … or 30 years, whichever comes first.
These stocks to buy are so totally tied into the human experience that it would basically take the world’s population becoming zombies for them to cease doing business. They’re great investments because you don’t have to spend all of your time worrying about when to buy and when to sell.
The three stocks: Chevron (CVX), AutoZone (AZO), Berkshire Hathaway (BRK.B).
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Martin Hutchinson's six dividend stocks to hold forever.
Today, it's all about the fast money. In the market, out of the market... this stock, that stock...
Of course, that's perfectly fine for traders. The good ones earn small fortunes that way. But for folks who don't have that kind of experience, being nimble is simply an invitation to be whipsawed by the markets.
You may be one of them.
For instance, are you fed up with stock recommendations that only seem to last a couple of weeks?
Or do you constantly find yourself buying on a day when the market is hot, because you feel enthusiastic, only to end up selling on a bad day, because the same stock suddenly looked less attractive?
If so, there's a solution to all this day-to-day madness. Despite the rumors of its demise, there are still stocks you can buy and hold forever.
Of course, seasoned income investors have known this for years. That's why the truly rich don't spend their days watching the financial news and trading stocks. They're too smart for that.
They know that investing in steady-income producing dividend stocks is just as rewarding over the long haul.
However, picking successful dividend-paying stocks is not as simple as buying only the stocks with the highest yield. In fact, the stocks with the highest yields are often the ones that trip up investors the most.
When it comes to buying stocks you can truly hold forever, what's important is the company's track record.
Specifically, you're looking for companies that have a decades-long record of increasing dividends and providing value to investors.
These are stocks that can generate profits like clockwork-even in down markets. And here's something you may not realize: even with all of the twists and turns there are plenty of these companies to consider.
In fact, at the moment there are 10 companies that have increased dividends every year for 50 years or more, another thirty-eight that have succeeded in doing so for 40 years and another forty-one companies that have increased their dividends every year for 30 years.
But many of the richest, most successful investors, politicians and businessmen have been quietly cashing in on them for decades.
Watch the 90-second video below to see how you can too...
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Elliott Gue will be a familiar name to longtime Gumshoe readers — he’s been a fixture in newsletter land for as long as we’ve been around (Stock Gumshoe’s sixth birthday was a couple months ago, thanks very much), and he’s got a new home. He ran the venerable Personal Finance letter for a while and built a bit of a name for himself as an energy investing specialist at Energy Strategist before leaving that publisher and signing on with StreetAuthority.
And now Gue is headlining several letters for StreetAuthority, including the StreetAuthority Top Ten Stocks letter that tries to pick out favorite ideas from all the other letters at that publisher. Several of the publishers have these “best of the best” newsletters, and they’re usually treated as inexpensive ways to get people introduced to the letters (and hopefully drive them to “upgrade” to subscriptions to the more expensive services they offer).
But that doesn’t mean they’re not useful or interesting, of course — and one of the ways they’ve pitched this service in the past, back when it was still helmed by founder Paul Tracy, was by teasing a list of their favorite “forever” stocks that you can buy and hold, well, forever. So whenever they trot out this teaser campaign, as they’ve just done under Gue’s signature, I like to have a look.
Why? Well, partly because lots of readers ask about these — and partly because, frankly, buying solid stocks of this ilk and holding for a long time is probably still the easiest way for an investor to do well without great expertise or a big time commitment. The average holding period for stocks is probably down to just a month or two now, maybe less, and that means a lot of individual investors are trying to time little market moves and are probably, on average, failing to keep up with the market — and paying higher commissions and taxes along the way.
I can’t get up here and tell you that “buy and hold” is the best or only strategy for everyone, of course, and it’s not the only strategy I pursue … but buying great companies and holding for many, many years — preferably with a nice, compounding dividend stream that lets the investment grow even faster — has worked better for me, more often, than most of the other strategies I use.
As in past iterations, they “give away” the top two names for free — the first is what Elliott Gue calls his favorite “Rockefeller Stock,” Brookfield Infrastructure Partners (BIP). That’s a publicly traded partnership that owns infrastructure assets, including a lot of utility assets (transmission lines, pipelines, connections) and transportation assets (railroad, toll road, ports), among other things (including a lot of timberland). The stock has been extraordinarily successful coming out of the financial crisis, with a very price appreciation and a solid and slowly growing 4.5% distribution yield.
This is one of those stocks that I’ve missed by always hoping it would get a bit cheaper — if rates rise considerably, it will be hurt, but they do own very valuable and long-lived assets, with regulated payouts, so that’s mostly just an interest rate risk (if you can buy a “safe” bond for 6% yield at some point in the future, the 4.5% yield from BIP will look less impressive).
And the second “freebie” is Google (GOOG). I have owned this one almost “forever” myself (I started buying about six months after the IPO and haven’t ever sold any), and if you can’t formulate an opinion on it for yourself it’s not for a lack of information — I consider Google one of the key utilities of the information age, and increasingly the most important advertising company in history. It’s not cheap anymore, but it shouldn’t have ever been cheap — adjusted for their huge cash balance they trade, on an earnings valuation, as pretty much an average S&P 500 Company. They’re far better than average, and they’re still growing nicely.
Then we get into the teasers …
“‘Forever’ Stock #3 is the most shareholder-friendly company I’ve ever seen. It has raised its dividend 84.8% since 2008… and has bought back 432 million of its own shares (about 20% of all shares outstanding). That’s one reason why earnings per share jumped 20% in 2011 and 6% in 2012. Buy it now and you’ll lock in a solid yield of about 4% (and I expect another dividend increase in the next few quarters). Meanwhile, the company plans billions more in share repurchases this year, which should support the stock price in just about any market.”
That one’s Philip Morris International (PM), the global tobacco company. Yield is down to about 3.6% now thanks to a rising share price, but they have increased the dividend 84.8% since they split from Altria in 2008 (46 cents/quarter to 85 cents/quarter), and they probably will keep raising the dividend and buying back more shares — the debt is low and the payout ratio is low (they pay out 64% of earnings as dividends), so it should be pretty stable. I don’t buy tobacco stocks for personal reasons, but most of them have been excellent income investments over the past decade or more — when Jeremy Siegel looked at the best stock market returns from 1925 to the present, Philip Morris (the original, combined company before the Altria-PM split) was number one, thanks largely to the many decades of reinvesting those dividends.
Next!
“‘Forever Stock’ #4 is a fund with a simple mission — to buy stakes in the most stable utility companies on the earth and pay investors a fat dividend yield. It owns telecoms in Israel, electric companies in Brazil, and water utilities in the United States. It’s returned 11% per year since its inception in 2004… and it has boosted its dividend 28.9% along the way. In total, the fund has paid more than 100 consecutive dividends and currently yields 6.0%. But don’t expect to have heard of this one… it trades only 100,000 shares a day — about what Apple trades in two minutes.”
This one they’ve teased in previous lists, it’s the Reaves Utility Income Fund (UTG), a closed-end fund that holds utilities and uses leverage to boost their returns — they include telecoms in their definition of “utilities”, so you’ll see both Verizon and AT&T in their top holdings alongside familiar utilities like Duke Energy or Entergy, but they have indeed returned an annualized 11% a year since 2004. The fund has actually done better than that on a net asset value basis (12% annual return), but the typical closed-end fund discount means that actual shareholders have gotten an 11% average annual return.
Right now, with folks getting a bit concerned about utilities as they watch the Fed’s chatter about possible interest rate increases, the shares are down a bit and the fund is trading again at a decent discount to net asset value. Right now, you can buy shares at about a 5% discount to the net asset value, and the yield is about 6%, with a monthly payout of 13 cents. You can see their full profile at CEF Connect here.
You can also, if you don’t want to go “forever,” go riskier and higher-yield with utility closed-end funds with, for example, the Gabelli Utility Trust (GUT), but some of the higher yield on that one comes from return of capital — and that particular fund has fallen by more than 25% over the past year even as the net asset value has risen because investors have bumped it down from a huge and ridiculous 50% premium to NAV to a still-high 13% premium. Or go more mainstream with an ETF like the Utilities Select SPDR (XLU), but that gets you a yield below 4%. Utilities are worrisome when investors start to see rising rates in the future, so be mindful that even solid companies that will be needed forever can go down in price if they’re valued by investors based on their dividend yield, as most utilities are, and the interest rate universe changes around them. I’d definitely buy a fund before I bought an individual utility, but I don’t need current income from this sector so I’m just as happy letting Warren Buffett build up his Berkshire Hathaway (BRK-B) utility holdings on my behalf.
Next!
“‘Forever Stock’ #5 was founded in 1966, but you couldn’t buy a stake until six years ago. Since it’s gone public, the stock is up 1,079% thanks to its seemingly unstoppable growth. Maybe that’s what attracted the world’s greatest investor– Warren Buffett– and his investment team. His giant investment firm, Berkshire Hathaway, bought a 216,000 share stake in this ‘Forever’ stock in 2011. And then Berkshire doubled down — buying 189,000 more shares the next quarter.”
This one is MasterCard (MA). Dammit. Every time I see this stock I’m reminded of not having bought it years ago because I was wary of the price. Turns out, a duopoly with a rapidly growing global clientele can be a great buy even when it’s not clearly cheap — I didn’t buy MA when it was at $100, and though it’s not cheap at the moment it might not ever be cheap, you can certainly argue that the valuation is fair with a forward PE of 19 and a near-$600 share price. I might slightly prefer the larger Visa (V) at current prices, but it’s a close call and both are hugely profitable behemoths who will probably continue to rule the world of plastic and electronic payments. Both pay dividends that are almost criminally small, but both are also growing their dividend rapidly.
“Forever Stock #6 tracks an index that has returned 396% over the past 10 years. It does so well because it holds dozens of energy partnerships that are legally bound to pay out the bulk of their cash flow to investors. Best of all, most of these businesses pay zero corporate tax.”
This one looks like it’s a repeat, the “Forever Stock #6″ back in 2011 was teased similarly and they offered more clues that time, so unless they’ve switched to a different fund of master limited partnerships (MLPs) this should be the JP Morgan Alerian MLP Index ETN (AMJ). That’s an Exchange Traded Note, not an Exchange Traded Fund, so it’s a JP Morgan debt instrument that they promise will track the returns of the Alerian index of mostly pipeline and midstream MLPs.
There are also ETFs and closed-end funds that track MLPs. Over the past year the AMJ ETN has done considerably better than the most widely-followed ETF, ticker AMLP — partly because JP Morgan halted creation of new units of this ETN because it was getting so big, so it’s now trading at a premium to its actual value now, and partly because ETNs don’t pay taxes like the ETFs do. So AMJ now has an effective yield of about 4.5%, and AMLP yields closer to 6%, based on effectively the same underlying portfolio and same management fee. Given that, if you want the ETN structure I’d be a bit wary of giant AMJ and consider one of the newer ETNs that is not self-limited and probably isn’t trading at a premium, like AMU from UBS, but I have not double checked the current state of that one. Buying any ETF or ETN to get your MLP exposure basically means you give up some of the tax-deferral advantage of MLP ownership in exchange for some diversification and the absence of those dreaded (by some) K-1 forms for partnership unitholders.
“‘Forever’ Stock #7 is a fund that holds 280 fast-growing companies in emerging markets like Taiwan, Brazil and Malaysia. At first glance you might think that’s risky… until you realize that these economies are growing 2X and 3X faster than ours. This ‘Forever’ idea is a superb way to profit from that fact. Meanwhile, you get a yield close to 4% — surprisingly generous for stocks with such explosive potential.”
I’ll wager that this is another copy-and-paste from their last “forever” list, and that time I guesstimated that this was the WisdomTree Emerging Markets Equity ETF (DEM), which does still yield better than 3% (3.3% at the moment, according to Yahoo Finance), and it has tracked the broader emerging markets ETF (EEM) almost exactly over the past two years while payout out a dividend yield that’s twice as high. That dividend focus means they have big exposure to energy/commodities and banks, which is not unusual for an emerging markets fund — Gazprom, Vale, Lukoil and a few Chinese banks are in their top ten holdings. EEM is far more diversified, for sure (largest holding is Samsung, they index by market cap, not by dividend yield), and has done better than DEM over the past year, but since DEM’s inception about five years ago it has edged out EEM.
“Every $1,000 you invested in “Forever” Stock #8 back in 1972 would be worth a stunning $2,030,000 today. Maybe that’s why it’s one of Congress’ favorite “sweetheart” stocks. In total, more than 50 members of Congress own a stake. All the big banks own a piece of this company, too. Morgan Stanley owns 31 million shares. JPMorgan Chase owns 32 million. Bank of America owns 37 million. And Goldman Sachs owns over 13 million shares of this stock.
“Meanwhile, the company is raising its dividend, spending billions to buy back its own shares, making smart acquisitions, and according to investment research firm Morningstar, owns an ’80% stranglehold on a $30 billion market…’”
This one is Intel (INTC), another stock that I own and am delighted to allow to compound in my portfolio — they get beaten down from time to time as fears rise about the soft PC market, but I wouldn’t bet against Intel’s unmatched manufacturing capacity or their ability to pound their way into the growing mobile market, and they still make lots of money on PC and server chips even if the speed of the collapse of the personal computer business has really shocked most of the players. I’ve built my personal position in Intel over the last couple years with buys between $20-$23, and bought most recently back in March. I don’t know if it will be a forever stock for me, but I think investors are over-worrying when it comes to this dominant company and I like watching those new shares compound and grow my account every few months.
“I like to call ‘Forever’ Stock #9 ‘Baby Berkshire.’ It invests just like Warren Buffett’s Berkshire Hathaway, but there is one major difference…
“This company is still small enough to make nearly any investment it wants, which frees it up to short for big returns. Warren Buffett himself said of his company, ‘Berkshire’s capital base is now simply too large to allow us to earn truly outsized returns.’
“House Majority Leader Eric Cantor (R-VA) owns at least $100,000 of this stock… and for good reason. From its low in March 2009, the shares have more than doubled.”
Looks like this is another repeat and another personal favorite, Markel (MKL), the specialty insurer that does often get compared to Berkshire Hathaway and which just closed a company-changing acquisition of Alterra to almost double their size. Markel is a great company, it was an extraordinarily easy buy when it collapsed on the announcement of the Alterra bid, and I bought some then and wrote about it for the Irregulars (it jumped up to be of my top five holdings this year). There’s still a possibility that the integration of the companies will be trickier and hurt earnings or book value, particularly if Markel wants to increase reserves on the Alterra business to match its more conservative profile, or is slow to adjust Alterra’s portfolio, so I’m trying to be patient and wait for a possible a dip in the stock when they announce their first couple consolidated quarters later this year — but, to be honest, I’ve considered adding to my position recently even without a dip, just because Markel’s more flexible investing mandate tied to Alterra’s now bond-dominated portfolio could generate dramatic performance improvement over the next few years.
And finally, number 10:
“I looked all the way to South America for ‘Forever’ Stock #10, but don’t worry… it trades right on the New York Stock Exchange.
“It’s the largest electricity company in Brazil, boasting more than 7 million customers. Like many utilities, its profits are driven by its monopolistic position. It sells three-quarters of its total power to captive customers who can’t switch to another supplier.
“Meanwhile, the company makes the point of distributing at least 50% of its income to shareholders… good now for a very safe yield of 7.0%.”
Similar picks have been teased by the StreetAuthority folks several times over the last couple years, and the two likely picks are the two largest NY-traded Brazilian electric utilities, CPFL Energia (CPL) and Companhia Energetica de Minas Gerais (CIG). CPFL has been a bit steadier and pays closer to a 7% yield (it would be 7% based on the 2012 dividends and the current share price, though the initial 2013 dividend paid just last month trended lower). Brazilian utilities are having some trouble with regulation and haven’t been able to get pricing increases — in many cases they’ve seen rate cuts as the government wants to lower costs for users — so the regulatory environment might not be as steady as we typically see for US utilities. Both have more than seven million customers and both do generation, transmission and delivery of electricity to end users, though concentrated in different states (CIG in Minas Gerais, CPL in Sao Paolo and Rio Grande do Sul — all three are among the most populous and developed states in Brazil).
So there you have it — not a lot of new names for you, but a reiteration under new editor Elliott Gue that they’ve got ten “forever” stocks to build a future on.
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Hey, here's the secret report! (stockgumshoe went 10 for 10.)
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Forbe's five stocks to hold forever.
So how do you know which stocks are “buy and hold forever” stocks and which are at risk of going the way of BlackBerry or Penney? There are no rules that are guaranteed to work 100% of the time, but these guidelines will get you close:
So how do you know which stocks are “buy and hold forever” stocks and which are at risk of going the way of BlackBerry or Penney? There are no rules that are guaranteed to work 100% of the time, but these guidelines will get you close:
- The company is a leader in its respective industry.
- The industry is not particularly susceptible to technological disruption.
- Demand for the company’s products is relatively immune from fickle consumer tastes.
- The company has a “black swan proof” balance sheet with modest amounts of debt.
- The company has a long history of prudent shareholder-friendly actions, such as paying and raising the dividend.
Likewise, because they are by nature highly-leveraged and subject to macro shocks, banks are a no-go on the buy-and-hold-forever list. And finally, JC Penney is a warning to all retailers, even well-managed ones like Wal-Mart and Target. Penney was once an innovative leader too; its catalogue business was the precursor to online shopping as we know it today. Wal-Mart and Target were the disruptors that wrecked Penney’s business. And unless they continue to adapt to fend off competition from Amazon.com, they will eventually succumb to Penney’s fate as well.
The five? Diageo, Unilever, Heineken, Realty Income, Nestle.
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Kiplinger's 7 blue chips to hold forever
You need courage to buy stocks nowadays. The market's turbulent start in 2009, coming on the heels of 2008's awful beating, hardly leaves investors feeling warm and fuzzy. The economy is in a deep slump, and the outlook for corporate earnings over the next few quarters is somewhere between murky and miserable.
How do you invest in stocks in the midst of so much turmoil and uncertainty? We suggest you focus on the long term -- say, a minimum of seven years -- and look for high-quality, blue-chip companies that have balance sheets as invulnerable as Fort Knox and can generate wads of cash.
Our thinking goes like this. It will take several years for consumers, the economy and the financial system to recuperate fully. Economic growth and therefore earnings growth are likely to be tepid over the next five or more years. But if you invest in well-managed, financially strong businesses that sell goods and services for which demand is consistently strong (think food and medicine, not arcane financial products), you should do well.
Businesses like these typically display certain characteristics: They carry little or no debt. They generate enough free cash flow (earnings plus depreciation and other noncash charges, minus the capital outlays needed to maintain the business) that they don't have to raise equity or sell debt -- a good thing in today's unfriendly capital markets. They have a proven history of management excellence. They have abundant opportunities for reinvesting capital (or clear policies for returning excess capital to shareholders), and their leaders boast an outstanding record of allocating capital. In addition, they are global in scope. After all, 95% of the world's population lives outside the U.S., and economic growth is likely to be greater abroad than at home.
We suggest that you focus on companies that pay out some of their profits; in a sluggish economic environment, much of your total return will come from reinvested dividends. Judy Saryan, co-manager of Eaton Vance Dividend Builder fund, notes that over the long haul, 40% to 45% of the return on stocks has come from reinvested dividends, a share she reckons will climb to 50% over the next five to ten years.
The seven: Philip Morris (PM), Nestle (NSRGY.PK), McDonald's (MCD), Monsanto (MON), ExxonMobil (XOM), Teva Pharmaceutical Industries (TEVA), IBM (IBM).
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From Lawrence Meyers, three stocks to buy and hold forever.
There’s a certain category of stocks that I consider stocks to buy and hold until the zombie apocalypse … or 30 years, whichever comes first.
These stocks to buy are so totally tied into the human experience that it would basically take the world’s population becoming zombies for them to cease doing business. They’re great investments because you don’t have to spend all of your time worrying about when to buy and when to sell.
The three stocks: Chevron (CVX), AutoZone (AZO), Berkshire Hathaway (BRK.B).
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Martin Hutchinson's six dividend stocks to hold forever.
Today, it's all about the fast money. In the market, out of the market... this stock, that stock...
Of course, that's perfectly fine for traders. The good ones earn small fortunes that way. But for folks who don't have that kind of experience, being nimble is simply an invitation to be whipsawed by the markets.
You may be one of them.
For instance, are you fed up with stock recommendations that only seem to last a couple of weeks?
Or do you constantly find yourself buying on a day when the market is hot, because you feel enthusiastic, only to end up selling on a bad day, because the same stock suddenly looked less attractive?
If so, there's a solution to all this day-to-day madness. Despite the rumors of its demise, there are still stocks you can buy and hold forever.
Of course, seasoned income investors have known this for years. That's why the truly rich don't spend their days watching the financial news and trading stocks. They're too smart for that.
They know that investing in steady-income producing dividend stocks is just as rewarding over the long haul.
However, picking successful dividend-paying stocks is not as simple as buying only the stocks with the highest yield. In fact, the stocks with the highest yields are often the ones that trip up investors the most.
When it comes to buying stocks you can truly hold forever, what's important is the company's track record.
Specifically, you're looking for companies that have a decades-long record of increasing dividends and providing value to investors.
These are stocks that can generate profits like clockwork-even in down markets. And here's something you may not realize: even with all of the twists and turns there are plenty of these companies to consider.
In fact, at the moment there are 10 companies that have increased dividends every year for 50 years or more, another thirty-eight that have succeeded in doing so for 40 years and another forty-one companies that have increased their dividends every year for 30 years.
These companies make excellent permanent investments, for four reasons:
- Their ability to increase dividends every year for several decades indicates that their business is long-term oriented and has the ability to survive recessions without crises.
- Having established a long track record of dividend increases, these companies are loath to break it, and so will make extra the effort to ensure they can continue paying dividends during recessions.
- Since we can be confident that these companies will continue to increase their dividends, investors no longer need to worry about their share prices (except as a chance to buy more.) At some point, the increased cash flow to investors will result in a higher stock value.
- The best thing: we don't have to pay a premium for these track records. Many of these companies are currently trading at a discount to the S&P 500's average of 15 times earnings.
Here are six of them, all with dividend yields above the current 30-year Treasury yield of 2.6%.
Procter and Gamble Co. (NYSE: PG): This consumer packaged goods company is the record-holder among all these heirloom stocks, having increased its dividend every year since 1954. P&G currently yields 3.7%, but its P/E ratio of 20 times historic earnings is higher than I like because of corporate raider Bill Ackman. He is buying shares aggressively through his vehicle Pershing Square. He'll get nowhere with it -- the company has a market capitalization of $179 billion and what possible reason would shareholders have for removing its management? Still, you might as well wait to buy until he's buzzed off.
Diebold Inc. (NYSE: DBD): DBD is a maker of self-service delivery and security systems for the financial services industry (such as ATMs). This company has also increased its dividend every year since 1954. It currently yields 3.2% and trades on 12.1 times earnings. The dividend is 2.6 times covered by earnings.
Emerson Electric (NYSE: EMR): Not only has this electrical equipment company increased its dividend every year since 1957, it's also on only its third CEO since 1954. That's my kind of management continuity, and the current guy is only 57 so he likely has a few years left yet. Emerson's yield is 3.6%, with a trailing P/E ratio of 14.1. Like P&G, this one benefits in a possible U.S. recession by having more than half of its business overseas.
3M Company (NYSE: MMM): This diversified technology company has long-term staying power. In the old days, 3M used to trade at 25-30 times earnings, so it's a real bargain at its current 14.5 times, although with only a 2.7% yield. This company has increased its dividend every year since the 1959 Cadillac was in vogue - the one with the fins!
Johnson & Johnson (NYSE: JNJ): This healthcare products manufacturer has increased dividends every year since 1963. It's had some problems recently so earnings are a little depressed and it's trading at 18.8 times earnings. But with a yield of 3.6% and debt only 15% of its balance sheet, JNJ is a rock solid investment for your grandchildren.
ABM Industries Inc. (NYSE: ABM): This is the relative fly-by-night of the group, having only increased its dividends every year since 1965. The company provides integrated facilities management solutions, cleaning, maintenance, parking lots and security. It has a dividend yield of 3.2%, a P/E ratio of 14.5, and a market capitalization of $1 billion, a considerably smaller company than others on this list.
So there you have it. Buy and hold is wounded but far from dead. Buy these, relax, and enjoy the steady and increasing stream of dividends.