Haven't seen Kudlow's show on CNBC lately. What happened? Did the show get cancelled? Did he get fired? Did he move to Fox? Let's see.
Ah, here's the story from March.
"The Larry Kudlow Report" will end its run on CNBC later this month, the network said on Friday, with host Larry Kudlow staying on as a senior contributor.
"Larry expressed his love of the network and personal pride in what had been accomplished on his program over the years but now wanted to slow down just a bit," the network's president, Mark Hoffman, told staff in a memo on Friday. "As an interviewer, he is unfailingly polite and energetic, skillfully grilling guests but always ending a segment graciously.
"Larry has always brought great enthusiasm to every program and appearance," Hoffman said.
The CNBC executive did not say what would replace Kudlow's program — only that the network was "working on plans" for the 7 p.m. Eastern time slot.
Kudlow, 66, will contribute to the "Business Day" program on CNBC, Hoffman said.
In January 2009, "The Kudlow Report" succeeded "Kudlow & Company," which aired from 2005 until October 2008. Before that, starting in 2002, the program was called "Kudlow & Cramer" — with investment guru Jim Cramer as co-host — and from 2001 to 2002, the program was called "America Now."
Featuring a mixture of business and politics, Kudlow's program hosted such guests as former President George W. Bush, former Vice President Dick Cheney, former Secretary of State Henry Kissinger, and current Defense Secretary Chuck Hagel.
Some of his guests from the business world have included media mogul Barry Diller and energy investor T. Boone Pickens.
A columnist and radio program host, Kudlow served in the Office of Management and Budget during the Ronald Reagan White House, worked as chief economist at Bear Stearns on Wall Street, and served as an economist for the Federal Reserve Bank of New York.
[He's only 66?]
Thursday, July 31, 2014
Tuesday, July 29, 2014
Social Security and Medicare status update
CHICAGO (Reuters) - If you worry about the future of Social Security
and Medicare, this is the week to get answers to your questions. The
most authoritative annual reports on the long-term health of both
programs were issued on Monday, and while the news was mixed, there are
reasons to be encouraged about our two most important retirement
programs.
Under the Social Security Act, a board of trustees reports annually to Congress on the status and long-term financial prospects of Social Security and Medicare. The reports are prepared by the professional actuaries who have made careers out of managing the numbers and are signed by three cabinet secretaries, the commissioner of Social Security and two publicly appointed trustees - one Republican, one Democrat.
Here are my five key takeaways from this year’s final word on our social insurance programs.
- Imminent collapse nowhere in sight. Social Security and Medicare face long-term financial problems, but there’s no cause for panic about either program.
Social Security’s retirement program is fully funded for the next 19 years. It has $2.8 trillion in reserves, and that figure will rise to $2.9 trillion in 2019, when the surplus funds will begin depleting rapidly as baby boomer retirements accelerate. Although you’ll often hear that Social Security spends more annually than it receives in taxes, the program actually took in $32 billion more than it spent last year, when interest on bond holdings and taxation of benefits are included.
The retirement trust fund will be depleted in 2034, at which point current revenue would be sufficient to pay only 77 percent of benefits - unless Congress enacts reforms to put the program back into long-term balance.
Medicare’s financial outlook improved a bit compared with last year’s report because of continued low healthcare inflation. The program’s Hospital Insurance trust fund - which finances Medicare Part A - is projected to run dry in 2030, four years later than last year’s forecast and 13 years later than forecast before passage of the Affordable Care Act (ACA).
In 2030, the hospital fund would have enough resources to cover just 85 percent of its expenditures. (Medicare’s other parts - outpatient and prescription drug services - are funded through beneficiary premiums and general revenue, so they don’t have trust funds at risk of running dry.)
Under the Social Security Act, a board of trustees reports annually to Congress on the status and long-term financial prospects of Social Security and Medicare. The reports are prepared by the professional actuaries who have made careers out of managing the numbers and are signed by three cabinet secretaries, the commissioner of Social Security and two publicly appointed trustees - one Republican, one Democrat.
Here are my five key takeaways from this year’s final word on our social insurance programs.
- Imminent collapse nowhere in sight. Social Security and Medicare face long-term financial problems, but there’s no cause for panic about either program.
Social Security’s retirement program is fully funded for the next 19 years. It has $2.8 trillion in reserves, and that figure will rise to $2.9 trillion in 2019, when the surplus funds will begin depleting rapidly as baby boomer retirements accelerate. Although you’ll often hear that Social Security spends more annually than it receives in taxes, the program actually took in $32 billion more than it spent last year, when interest on bond holdings and taxation of benefits are included.
The retirement trust fund will be depleted in 2034, at which point current revenue would be sufficient to pay only 77 percent of benefits - unless Congress enacts reforms to put the program back into long-term balance.
Medicare’s financial outlook improved a bit compared with last year’s report because of continued low healthcare inflation. The program’s Hospital Insurance trust fund - which finances Medicare Part A - is projected to run dry in 2030, four years later than last year’s forecast and 13 years later than forecast before passage of the Affordable Care Act (ACA).
In 2030, the hospital fund would have enough resources to cover just 85 percent of its expenditures. (Medicare’s other parts - outpatient and prescription drug services - are funded through beneficiary premiums and general revenue, so they don’t have trust funds at risk of running dry.)
Monday, July 28, 2014
momentum investing
A massive academic study looking at the transaction data generated by
individual investors over the past two decades basically shows that
small traders tend to engage in trades that contribute to momentum
returns. The same analysis if applied to the transaction data generated
by large institutional investors shows that institutional investors tend
to react more appropriately to gains and losses.
Essentially the individual traders are contributing to the returns generated from a momentum-based investment strategy. Basically, stocks that have the greatest ownership by individuals as opposed to institutions tend to show the strongest profits in response to momentum trading strategies.
Now, if it were the case that individuals contributed to momentum returns by behavioral biases, we would expect to see stocks with low volume - which would be more likely to be held by individuals - to exhibit stronger momentum returns. This is exactly what the data shows.
Basically, if you are going to buy momentum stocks, you want to buy those that are owned primarily by individuals as opposed to institutions. The straight-forward reason is that individuals are more governed by their psychology than institutions. As a result, individuals tend to become more risk averse when a stock rises in price and are likely to sell too early. This means that those stocks that have appreciated dramatically in price over the past months are poised to go even higher as they have been unduly sold by individuals who have become risk averse.
Additionally, there is good evidence that over the past seventy years, momentum strategies seem to work much better in periods of economic expansion. Generally speaking, momentum strategies do not work well during recessions and at the turning points when the economy shifts from an expansionary phase to a recessionary phase or vice versa.
If you take a step back and think about it, this makes logical sense. During an expansion, the stocks exhibiting the most momentum will be those which are benefiting the most from the expansion. These stocks will tend to be the most cyclical stocks, and those that will be hit the hardest if the expansion disappoints and the economy begins to contract. Keeping that in mind, if you are going to employ a pure momentum strategy, you must always keep one eye on the economy. If there is a whiff of a recession, you need to be transitioning to more of a value-driven strategy.
Essentially the individual traders are contributing to the returns generated from a momentum-based investment strategy. Basically, stocks that have the greatest ownership by individuals as opposed to institutions tend to show the strongest profits in response to momentum trading strategies.
Now, if it were the case that individuals contributed to momentum returns by behavioral biases, we would expect to see stocks with low volume - which would be more likely to be held by individuals - to exhibit stronger momentum returns. This is exactly what the data shows.
Basically, if you are going to buy momentum stocks, you want to buy those that are owned primarily by individuals as opposed to institutions. The straight-forward reason is that individuals are more governed by their psychology than institutions. As a result, individuals tend to become more risk averse when a stock rises in price and are likely to sell too early. This means that those stocks that have appreciated dramatically in price over the past months are poised to go even higher as they have been unduly sold by individuals who have become risk averse.
Additionally, there is good evidence that over the past seventy years, momentum strategies seem to work much better in periods of economic expansion. Generally speaking, momentum strategies do not work well during recessions and at the turning points when the economy shifts from an expansionary phase to a recessionary phase or vice versa.
If you take a step back and think about it, this makes logical sense. During an expansion, the stocks exhibiting the most momentum will be those which are benefiting the most from the expansion. These stocks will tend to be the most cyclical stocks, and those that will be hit the hardest if the expansion disappoints and the economy begins to contract. Keeping that in mind, if you are going to employ a pure momentum strategy, you must always keep one eye on the economy. If there is a whiff of a recession, you need to be transitioning to more of a value-driven strategy.
-- Mitch Zacks, ZIM Weekly Update
Where your Dollars Go
Americans today
spend their money on the same things they always have, including
housing, health care, transportation, food, and entertainment. But while
what we spend money on has stayed essentially the same in recent
decades, how that spending is distributed has changed in significant
ways. In 1952, health care costs made up just 5% of Americans’ annual
spending.1 But health care costs have risen substantially
over the decades, partly due to the increased cost of advanced medical
technology.
Meanwhile, improved efficiency in production and manufacturing methods pushed down the cost of food and clothing. In 1952, Americans spent more than 40% of their income on what they wore and what they ate. Sixty years later, those categories made up just 17% of household spending. At the same time spending has been reduced on food and clothes, the amount spent on financial services and insurance has more than doubled between 1952 and 2012.
1952 1972 2012
Food 29% 21% 14%
Housing 16% 18% 18%
Health Care 5% 9% 20%
Transportation 11% 13% 10%
Clothing 11% 8% 3%
Financial Services/Insurance 3% 5% 7%
Recreation 6% 7% 9%
-- T. Rowe Price Investor, June 2014
Meanwhile, improved efficiency in production and manufacturing methods pushed down the cost of food and clothing. In 1952, Americans spent more than 40% of their income on what they wore and what they ate. Sixty years later, those categories made up just 17% of household spending. At the same time spending has been reduced on food and clothes, the amount spent on financial services and insurance has more than doubled between 1952 and 2012.
1952 1972 2012
Food 29% 21% 14%
Housing 16% 18% 18%
Health Care 5% 9% 20%
Transportation 11% 13% 10%
Clothing 11% 8% 3%
Financial Services/Insurance 3% 5% 7%
Recreation 6% 7% 9%
-- T. Rowe Price Investor, June 2014
Bill Bernstein
In 2000, Bill (not Peter) Bernstein published his first book, The Intelligent Asset Allocator. It yanked away the punch bowl from the New Era's party. While other investment publications (most notably, the best-seller Dow 36,000) advocated euphoria and heavy doses of then-popular growth stocks, The Intelligent Asset Allocator
preached the unfashionable virtues of diversification, caution, and
contrarianism. Among its recommendations were REITs and gold stocks. It
was, in short, a hopeless cause--the rare investment tome that sold what
would succeed, rather than what had already thrived. Obscurity beckoned.
This summer, Bernstein published a sequel: Rational Expectations: Asset Allocation for Investing Adults. Much of the material--the basics of Modern Portfolio Theory, asset allocation, and the efficient-market hypothesis--is familiar, although freshly presented. The changes interested me most, however. They addressed my favorite investment question (typically aimed at fund managers, but applicable to authors as well): What have you learned since you started in the business?
Bernstein writes, "As Warren Buffett famously observed, investing is not a game in which the person with an IQ of 160 beats the person with an IQ of 130. Rather, it's a game best played by those with a broad set of skills that are rich not only in quantitative ability but also in deep historical knowledge, all deployed with Asperger's-like emotional detachment."
In fact, continues Bernstein, being extremely bright and technically accomplished can actually be detrimental to investment performance. As with prom queens, who overstate the importance of beauty, the quantitatively adept will sometimes overestimate the value of their own gifts. The geniuses at Long-Term Capital Management, for example, had rather too much faith in their ability to outsmart the marketplace and rather too little recognition of the possibility that they might be wrong. Bernstein suspects that many of his readers may fit a similar profile and pleads with them to "fill in what may be the shallow areas ... a working knowledge of financial history and a healthy dollop of self-awareness about [their] discipline under fire."
Put another way, a powerful mindset is at least as important for investing success as is a powerful mind. This realization did not come immediately to Bernstein because the mindset came naturally to him. He was willing to follow what the data suggested, regardless of how his actions looked to others, and regardless of whether the market seemed to agree--even if the market's disagreed for several years. (As with other contrarians, Bernstein spent much of the late 1990s doubling down on losing value stocks, and looking ever more foolish in doing so.)
Most people, however, are wired differently. In Rational Expectations, Bernstein painstakingly explains what was mostly implicit in his first book: Emotions destroy investment performance. Somehow, some way, investors must suppress them. The suppression might come from the blessing of nature; from ongoing investment education; through shielding mechanisms such as holding a blind trust; or, most commonly, by cutting back on stocks and holding a lower-volatility asset allocation. One way or another, though, it needs to happen.
Paradoxically, writes Bernstein, the task is hardest for people who are otherwise admirable. He states, "The most emotionally intelligent and empathetic people I know tend to be the worst investors. After all, the very definition of 'empathy' is to feel the emotions of others, which is deadly in investing." Bernstein relays the story of hospital patients who have brain lesions that disconnect their sense of fear; in investment simulations, those patients handily outperform the general population. For most people, investing successfully is a deeply unnatural act.
This summer, Bernstein published a sequel: Rational Expectations: Asset Allocation for Investing Adults. Much of the material--the basics of Modern Portfolio Theory, asset allocation, and the efficient-market hypothesis--is familiar, although freshly presented. The changes interested me most, however. They addressed my favorite investment question (typically aimed at fund managers, but applicable to authors as well): What have you learned since you started in the business?
Bernstein writes, "As Warren Buffett famously observed, investing is not a game in which the person with an IQ of 160 beats the person with an IQ of 130. Rather, it's a game best played by those with a broad set of skills that are rich not only in quantitative ability but also in deep historical knowledge, all deployed with Asperger's-like emotional detachment."
In fact, continues Bernstein, being extremely bright and technically accomplished can actually be detrimental to investment performance. As with prom queens, who overstate the importance of beauty, the quantitatively adept will sometimes overestimate the value of their own gifts. The geniuses at Long-Term Capital Management, for example, had rather too much faith in their ability to outsmart the marketplace and rather too little recognition of the possibility that they might be wrong. Bernstein suspects that many of his readers may fit a similar profile and pleads with them to "fill in what may be the shallow areas ... a working knowledge of financial history and a healthy dollop of self-awareness about [their] discipline under fire."
Put another way, a powerful mindset is at least as important for investing success as is a powerful mind. This realization did not come immediately to Bernstein because the mindset came naturally to him. He was willing to follow what the data suggested, regardless of how his actions looked to others, and regardless of whether the market seemed to agree--even if the market's disagreed for several years. (As with other contrarians, Bernstein spent much of the late 1990s doubling down on losing value stocks, and looking ever more foolish in doing so.)
Most people, however, are wired differently. In Rational Expectations, Bernstein painstakingly explains what was mostly implicit in his first book: Emotions destroy investment performance. Somehow, some way, investors must suppress them. The suppression might come from the blessing of nature; from ongoing investment education; through shielding mechanisms such as holding a blind trust; or, most commonly, by cutting back on stocks and holding a lower-volatility asset allocation. One way or another, though, it needs to happen.
Paradoxically, writes Bernstein, the task is hardest for people who are otherwise admirable. He states, "The most emotionally intelligent and empathetic people I know tend to be the worst investors. After all, the very definition of 'empathy' is to feel the emotions of others, which is deadly in investing." Bernstein relays the story of hospital patients who have brain lesions that disconnect their sense of fear; in investment simulations, those patients handily outperform the general population. For most people, investing successfully is a deeply unnatural act.
Sunday, July 20, 2014
still big after all these years
Of the 10 largest companies in the S&P 500 Index in terms of market capitalization in 1992, five still retain that position (ExxonMobil, AT&T, IBM, General Electric, and Procter & Gamble). The other five have been replaced by Apple, Microsoft, Google, Chevron, and Johnson & Johnson.
Mr. Puglia: History will tell you that change occurs and the leadership of the market changes accordingly. It has been very difficult for companies to sustain dominant positions. But it’s much more difficult to sustain leadership in the technology area where companies are subject to shorter product life cycles.
I think it’s noteworthy that IBM has been able to maintain its leadership, and the reason is that it has been strong in services and software rather than being solely subject to product life cycles. It’s also a little easier for companies in staples, such as Procter & Gamble, to maintain leadership over time.
Mr. Berghuis: I was surprised that five of the top 10 are still there. It shows that there is more stability and persistence in our economy and in corporate America than perhaps is commonly perceived.
Our economy is evolving, but that’s not to say that if you invest in a blue chip company today it won’t still be a reasonably vibrant company a generation later if it is well managed.
-- T. Rowe Price Report, Winter 2013
Looking at ETF Database, the other five in 1992 were Wal-Mart, Philip Morris, Coca Cola, Merck, Royal Dutch Petroleum, Bristol-Myers Squibb. Wait that's six. IBM is not in their list.
And they have Pfizer instead of Google in 2012.
Apple appeared on the list in 2009 at #5. Went to #2 in 2010 behind XOM. Then surpassed XOM in 2012.
Checking the ETF Database, I'm surprised how much the top ten changes every year. Three of the top ten changed in 2013, 2012, 2010, 2009, 2007. Five of the top 10 from 2006 are no longer in the top 10. And the only stocks to remain in the top ten every year since 2006 are XOM, MSFT, PG.
Mr. Puglia: History will tell you that change occurs and the leadership of the market changes accordingly. It has been very difficult for companies to sustain dominant positions. But it’s much more difficult to sustain leadership in the technology area where companies are subject to shorter product life cycles.
I think it’s noteworthy that IBM has been able to maintain its leadership, and the reason is that it has been strong in services and software rather than being solely subject to product life cycles. It’s also a little easier for companies in staples, such as Procter & Gamble, to maintain leadership over time.
Mr. Berghuis: I was surprised that five of the top 10 are still there. It shows that there is more stability and persistence in our economy and in corporate America than perhaps is commonly perceived.
Our economy is evolving, but that’s not to say that if you invest in a blue chip company today it won’t still be a reasonably vibrant company a generation later if it is well managed.
-- T. Rowe Price Report, Winter 2013
Looking at ETF Database, the other five in 1992 were Wal-Mart, Philip Morris, Coca Cola, Merck, Royal Dutch Petroleum, Bristol-Myers Squibb. Wait that's six. IBM is not in their list.
And they have Pfizer instead of Google in 2012.
Apple appeared on the list in 2009 at #5. Went to #2 in 2010 behind XOM. Then surpassed XOM in 2012.
Checking the ETF Database, I'm surprised how much the top ten changes every year. Three of the top ten changed in 2013, 2012, 2010, 2009, 2007. Five of the top 10 from 2006 are no longer in the top 10. And the only stocks to remain in the top ten every year since 2006 are XOM, MSFT, PG.
Saturday, July 19, 2014
opposite directions
Main Street and Wall Street are moving in opposite directions.
Individual investors are plowing money back into the U.S. stock market just as professional strategists say gains for this year are over. About $100 billion has been added to equity mutual funds and exchange-traded funds in the past year, 10 times more than the previous 12 months, according to data compiled by Bloomberg and the Investment Company Institute.
The growing optimism contrasts with forecasters from UBS AG to HSBC Holdings Plc, who say the stock market will be stagnant with valuations at a four-year high. While the strategists have a mixed record of being right, history shows the bull market has already lasted longer than average and individuals tend to pile in at the end of the rally.
"If Wall Street, after poring over all known data, comes up with a target and we're already there, and you still see individual investors buying and they're typically the ones that are late to the party, it would seem there is limited upside," Terry Morris, a senior equity manager who helps oversee about $2.8 billion at Wyomissing, Pennsylvania-based National Penn Investors Trust Co., said in a July 8 phone interview.
For most of this year, equity investors have seen little volatility and steady gains, giving them confidence to put money back into the market. Individuals deposited about $9.5 billion in June to stock funds and have added cash in eight of the past 10 months, data compiled by ICI and Bloomberg show. That's a reversal from the five years through 2012, when $300 billion was withdrawn.
Professional investors, such as Nick Skiming of Ashburton Ltd., say that individuals investors are attracted to stocks after seeing others getting rich from a big rally, a time when equities are usually overpriced. The bursting of the technology bubble in March 2000 was marked by mutual funds absorbing a record $102 billion in the first quarter.
"As institutional investors, we're always concerned when the retail investor is actually arriving in the market," Skiming, who helps manage $10 billion at Ashburton, said by telephone from Jersey, the Channel Islands. "The retail investor arrives when they can only see blue skies."
For Laszlo Birinyi of Birinyi Associates Inc., stocks have entered what he calls the exuberance phase, the last of four stages usually seen in bull markets. He still sees more gains to come, citing the skepticism on Wall Street as a sign that plenty of investors haven't bought shares yet.
Relatively expensive valuations will also limit future gains, according to Garry Evans, HSBC's global head of equity strategy in Hong Kong. He said in a report last week that the S&P 500 will finish the year at 2,000, a 1.6 percent gain from last week's close. The index trades at 16.6 times projected earnings, near the highest level in four years, data compiled by Bloomberg show.
The bull market, which has almost tripled the S&P 500's value since 2009, is closer to the end than the beginning, said Walter Todd, who oversees about $980 million as chief investment officer at Greenwood Capital Associates LLC. The rally has lasted 64 months, about a year longer than average, according to data since 1962 compiled by Birinyi and Bloomberg.
"To the extent that investors start to put a lot of money into the market, it would certainly be late," Todd said in a July 9 phone interview from Greenwood, South Carolina. "But to say that the end is going to happen in the next few months, I don't agree with that."
Individual investors are plowing money back into the U.S. stock market just as professional strategists say gains for this year are over. About $100 billion has been added to equity mutual funds and exchange-traded funds in the past year, 10 times more than the previous 12 months, according to data compiled by Bloomberg and the Investment Company Institute.
The growing optimism contrasts with forecasters from UBS AG to HSBC Holdings Plc, who say the stock market will be stagnant with valuations at a four-year high. While the strategists have a mixed record of being right, history shows the bull market has already lasted longer than average and individuals tend to pile in at the end of the rally.
"If Wall Street, after poring over all known data, comes up with a target and we're already there, and you still see individual investors buying and they're typically the ones that are late to the party, it would seem there is limited upside," Terry Morris, a senior equity manager who helps oversee about $2.8 billion at Wyomissing, Pennsylvania-based National Penn Investors Trust Co., said in a July 8 phone interview.
For most of this year, equity investors have seen little volatility and steady gains, giving them confidence to put money back into the market. Individuals deposited about $9.5 billion in June to stock funds and have added cash in eight of the past 10 months, data compiled by ICI and Bloomberg show. That's a reversal from the five years through 2012, when $300 billion was withdrawn.
Professional investors, such as Nick Skiming of Ashburton Ltd., say that individuals investors are attracted to stocks after seeing others getting rich from a big rally, a time when equities are usually overpriced. The bursting of the technology bubble in March 2000 was marked by mutual funds absorbing a record $102 billion in the first quarter.
"As institutional investors, we're always concerned when the retail investor is actually arriving in the market," Skiming, who helps manage $10 billion at Ashburton, said by telephone from Jersey, the Channel Islands. "The retail investor arrives when they can only see blue skies."
For Laszlo Birinyi of Birinyi Associates Inc., stocks have entered what he calls the exuberance phase, the last of four stages usually seen in bull markets. He still sees more gains to come, citing the skepticism on Wall Street as a sign that plenty of investors haven't bought shares yet.
Relatively expensive valuations will also limit future gains, according to Garry Evans, HSBC's global head of equity strategy in Hong Kong. He said in a report last week that the S&P 500 will finish the year at 2,000, a 1.6 percent gain from last week's close. The index trades at 16.6 times projected earnings, near the highest level in four years, data compiled by Bloomberg show.
The bull market, which has almost tripled the S&P 500's value since 2009, is closer to the end than the beginning, said Walter Todd, who oversees about $980 million as chief investment officer at Greenwood Capital Associates LLC. The rally has lasted 64 months, about a year longer than average, according to data since 1962 compiled by Birinyi and Bloomberg.
"To the extent that investors start to put a lot of money into the market, it would certainly be late," Todd said in a July 9 phone interview from Greenwood, South Carolina. "But to say that the end is going to happen in the next few months, I don't agree with that."
empty floors
UBS AG's trading floor in Stamford, Conn., once teemed with traders occupying a space equal to two football fields. The Guinness World Records recognized it as the biggest such facility on the planet. And the Swiss bank used it to showcase its Wall Street credentials.
Stu Taylor, a former UBS managing director in trading who now runs trading-technology company Algomi Ltd., remembers when guests were brought around the gallery regularly. "It was very much a showpiece," he said.
Today, there are virtually no traders shouting into their phones or staring at terminals. UBS's cavernous floor is taken up mostly by back-office, legal and technology staffers, according to people familiar with the bank.
A spokeswoman for UBS said the trading floor was built for 1,400 traders, but wouldn't disclose the number of employees at the facility.
A deep slump in trading activity in everything from stocks and bonds to currencies is changing the face of Wall Street. Businesses that once contributed disproportionately to the revenues of the world's largest banks are now bleeding jobs and sparking fears of a permanent decline.
Today's markets are "boring," said Thomas Thees, a former head of North American credit trading at Morgan Stanley and a former co-head of fixed income at Jefferies Group. "This is affecting the opportunity to make money, and ultimately the earnings these [trading] businesses can provide."
Global revenue from trading in fixed income, currencies and commodities, or FICC, dropped to $112 billion last year, down 16% from a year earlier and 23% from 2010, according to Boston Consulting Group.
As big banks with large trading operations such as J.P. Morgan Chase & Co., Goldman Sachs Group Inc. and Citigroup Inc. report second-quarter earnings results this week, investors and analysts will be trying to find out whether the slowdown is a temporary funk or a lasting shift.
The forces arrayed against banks' trading businesses are powerful. Since the financial crisis, regulators have limited their ability to take risks with their own money, and have made the process costlier, prompting many to dial back or push in different directions. At the same time, global markets have fallen into an unusually placid pattern that has damped clients' desire to make trades.
"It's been absolutely dead," said Jarrod Dean, a municipal-bond trader at Sierra Pacific Securities in Las Vegas. Municipal-bond trading volumes are down about 30% since last August, he said, while profits are down more than 70%. "We've just got to keep toughing it out," he said.
Friday, July 18, 2014
waiting for the correction
The long bull market in the United States remains intact but there have been some recent stumbles. We would like to see some further selling in order to correct some of the overly optimistic sentiment (a contrarian indicator) that's built up. The Ned Davis Research Daily Crowd Sentiment Poll recently hit its most optimistic level since the end of last year, near levels that have typically preceded a relatively decent pullback.
Additionally, midterm election years (like 2014), have historically brought decent-sized pullbacks in each year going back to 1962—ranging from -8% to -38% with the average decline being -19% (thanks to Strategas Research Partners), but those pullbacks have been followed by substantial rallies over the subsequent 12 months, ranging from 12% to 58% and averaging a whopping 32%. We haven't seen that type of pullback yet, and history doesn't always repeat, but it does often rhyme. Bottom line—in our view the possibility of correction is elevated, but we would view such an occurrence as a buying opportunity for those who have been under allocated to equities.
Valuations are being debated, with concerns about overvaluation growing—exacerbated by comments from the Fed related to biotechnology and social networking stocks. Given continued low interest rates and inflation, the market can likely maintain higher valuations, and current levels are roughly inline with where history has shown they should be. So while the market is no longer a significantly undervalued story, we don't believe valuations have become an impediment to this bull market.
-- Schwab Market Perspective, July 18, 2014
Additionally, midterm election years (like 2014), have historically brought decent-sized pullbacks in each year going back to 1962—ranging from -8% to -38% with the average decline being -19% (thanks to Strategas Research Partners), but those pullbacks have been followed by substantial rallies over the subsequent 12 months, ranging from 12% to 58% and averaging a whopping 32%. We haven't seen that type of pullback yet, and history doesn't always repeat, but it does often rhyme. Bottom line—in our view the possibility of correction is elevated, but we would view such an occurrence as a buying opportunity for those who have been under allocated to equities.
Valuations are being debated, with concerns about overvaluation growing—exacerbated by comments from the Fed related to biotechnology and social networking stocks. Given continued low interest rates and inflation, the market can likely maintain higher valuations, and current levels are roughly inline with where history has shown they should be. So while the market is no longer a significantly undervalued story, we don't believe valuations have become an impediment to this bull market.
-- Schwab Market Perspective, July 18, 2014
Friday, July 11, 2014
A brief history of Social Security
Living beyond one's productive, working years is a recent development in human history. Formal programs offering "social insurance" for the elderly were only proposed when people started, in greater numbers, to live beyond their ability to work effectively.
Until the 1840s, the U.S. was primarily an agricultural society in which the majority of people lived in rural areas. Extended families took financial responsibility for older members. But over the next five decades, technology advanced and the lives of workers changed dramatically—and life spans began to rise. Machines set the pace of work. Industrial output consistently outpaced agricultural output.
With better sanitation and health care, life spans increased a full 10 years in just the three decades between 1900 and 1930. By 1920, for the first time in the nation's history, more people lived in cities than on farms, fraying the support system of the extended family. The Great Depression made older Americans' work situations even more challenging—over half of the country's elderly couldn't support themselves.
On August 14, 1935, recognizing the need for federal assistance, Franklin D. Roosevelt signed the Social Security Act into law.
-- T. Rowe Price Investor, March 2013
Until the 1840s, the U.S. was primarily an agricultural society in which the majority of people lived in rural areas. Extended families took financial responsibility for older members. But over the next five decades, technology advanced and the lives of workers changed dramatically—and life spans began to rise. Machines set the pace of work. Industrial output consistently outpaced agricultural output.
With better sanitation and health care, life spans increased a full 10 years in just the three decades between 1900 and 1930. By 1920, for the first time in the nation's history, more people lived in cities than on farms, fraying the support system of the extended family. The Great Depression made older Americans' work situations even more challenging—over half of the country's elderly couldn't support themselves.
On August 14, 1935, recognizing the need for federal assistance, Franklin D. Roosevelt signed the Social Security Act into law.
-- T. Rowe Price Investor, March 2013
Saturday, July 05, 2014
why you invest the way you do
People like to assume they can think objectively. But you and I are just a product of the experiences we've had in life.
In 2006, Ulrike Malmendier of U.C. Berkeley and Stefan Nagel of Stanford University looked at how various cohorts of Americans differed in their views about investing.
Controlling for age, wealth, income, and other social factors, how the economy performed during people's young-adult years had a profound impact on how they invested later in life.
Those who grew up during the Great Depression were half as likely to invest in stocks as adults compared with those raised during the roaring 1960s. Those who grew up during the inflationary 1970s were less likely to invest in bonds later in life than those raised during the stable 1950s. Growing up during the prosperous 1980s made you highly likely to favor stocks during the 1990s. "Our findings suggest that individual investors' willingness to bear financial risk depends on personal history," the authors wrote.
This seems obvious, but there's an important takeaway: One person's view of risk can be completely different than someone else's. And not because one person is smarter or has better insight than another, but simply because they were born in a different year.
Emotional experiences also have a downside: Memories are often distorted, so much so that some of what we remember never actually occurred.
For decades, psychologists have interviewed people who had an emotional experience, sprinkled in some fake prompts, and watched their memories fool them on the spot. In one famous example, Lawrence Patihis of U.C. Irvine discussed 9/11 with a group of research subjects, and found that, when prompted, many could vividly describe seeing video of Flight 93 crash into a field in Pennsylvania (this video, of course, doesn't exist). "It just seemed like something was falling out of the sky," one participant said. "I was just, you know, kind of stunned by watching it go down." They weren't lying. This is a common flaw when recalling emotional experiences, as we try to forget painful memories and replace them with pleasant thoughts.
If someone's view of risk is influenced by what year they were born, and people's memories of emotional events may not even be accurate, there's an obvious lesson: When seeking advice, you should consult a variety of different people of different ages and backgrounds who have experienced different things in life.
This isn't a substitute for skill. But if you get all of your investment advice from 50-year-old white guys, you will get opinions from people whose worldview is colored by similar experiences. And those experiences may be incomplete, not relevant to today's world, and biased in thinking the future will resemble their specific past.
A common trait you'll see among the world's best investors is an open and flexible mind. They are happy to hear diverse opinions from people of all different ages and backgrounds. This isn't because they're nice, but because they understand everyone is biased to their own experiences, and that no group has a monopoly on wisdom. Think about the last five years, when lots of angry old men were hyperventilating about looming hyperinflation and the coming collapse of the dollar, while a bunch of college kids who were "ignorant of history" were busy building billion-dollar tech companies. Not being constrained by past experiences can be incredibly valuable.
In 2006, Ulrike Malmendier of U.C. Berkeley and Stefan Nagel of Stanford University looked at how various cohorts of Americans differed in their views about investing.
Controlling for age, wealth, income, and other social factors, how the economy performed during people's young-adult years had a profound impact on how they invested later in life.
Those who grew up during the Great Depression were half as likely to invest in stocks as adults compared with those raised during the roaring 1960s. Those who grew up during the inflationary 1970s were less likely to invest in bonds later in life than those raised during the stable 1950s. Growing up during the prosperous 1980s made you highly likely to favor stocks during the 1990s. "Our findings suggest that individual investors' willingness to bear financial risk depends on personal history," the authors wrote.
This seems obvious, but there's an important takeaway: One person's view of risk can be completely different than someone else's. And not because one person is smarter or has better insight than another, but simply because they were born in a different year.
Emotional experiences also have a downside: Memories are often distorted, so much so that some of what we remember never actually occurred.
For decades, psychologists have interviewed people who had an emotional experience, sprinkled in some fake prompts, and watched their memories fool them on the spot. In one famous example, Lawrence Patihis of U.C. Irvine discussed 9/11 with a group of research subjects, and found that, when prompted, many could vividly describe seeing video of Flight 93 crash into a field in Pennsylvania (this video, of course, doesn't exist). "It just seemed like something was falling out of the sky," one participant said. "I was just, you know, kind of stunned by watching it go down." They weren't lying. This is a common flaw when recalling emotional experiences, as we try to forget painful memories and replace them with pleasant thoughts.
If someone's view of risk is influenced by what year they were born, and people's memories of emotional events may not even be accurate, there's an obvious lesson: When seeking advice, you should consult a variety of different people of different ages and backgrounds who have experienced different things in life.
This isn't a substitute for skill. But if you get all of your investment advice from 50-year-old white guys, you will get opinions from people whose worldview is colored by similar experiences. And those experiences may be incomplete, not relevant to today's world, and biased in thinking the future will resemble their specific past.
A common trait you'll see among the world's best investors is an open and flexible mind. They are happy to hear diverse opinions from people of all different ages and backgrounds. This isn't because they're nice, but because they understand everyone is biased to their own experiences, and that no group has a monopoly on wisdom. Think about the last five years, when lots of angry old men were hyperventilating about looming hyperinflation and the coming collapse of the dollar, while a bunch of college kids who were "ignorant of history" were busy building billion-dollar tech companies. Not being constrained by past experiences can be incredibly valuable.
Wednesday, July 02, 2014
selling too soon
For growth investors, a cardinal sin is missing a successful growth company, such as Wal-Mart, Microsoft, or Apple, early on. But giving up on one too soon, due to a short-term concern, can be almost as painful.
Jack Laporte, who managed the small-cap New Horizons Fund for 22 years and has more than three decades of investment experience, recalls investing in Starbucks when the company went public in 1992. He sold it about two years later due to concerns about a spike in coffee costs cutting into profits. It was a good call at the time because the costs did rise and the stock stagnated for months.
While Mr. Laporte made a nice gain, the company’s later success made him regret the sale. He calculated that by 2006 the fund’s original position in Starbucks would have been worth an Benefiting From Mistakes Even the Pros Have Made additional $200 million.
“I outsmarted myself by trying to trade around a unique company, and that was a very expensive lesson,” he says. “It’s hard enough to find truly great companies like Starbucks with open-ended growth opportunities. When you find them, don’t get caught up in short-term valuation issues if they are growing rapidly.”
-- T. Rowe Price Report, Fall 2011
Jack Laporte, who managed the small-cap New Horizons Fund for 22 years and has more than three decades of investment experience, recalls investing in Starbucks when the company went public in 1992. He sold it about two years later due to concerns about a spike in coffee costs cutting into profits. It was a good call at the time because the costs did rise and the stock stagnated for months.
While Mr. Laporte made a nice gain, the company’s later success made him regret the sale. He calculated that by 2006 the fund’s original position in Starbucks would have been worth an Benefiting From Mistakes Even the Pros Have Made additional $200 million.
“I outsmarted myself by trying to trade around a unique company, and that was a very expensive lesson,” he says. “It’s hard enough to find truly great companies like Starbucks with open-ended growth opportunities. When you find them, don’t get caught up in short-term valuation issues if they are growing rapidly.”
-- T. Rowe Price Report, Fall 2011
Tuesday, July 01, 2014
The best investment advice of all time
Billionaires. A miser. A Nobel laureate. A Founding Father. We've
rounded up the finest market minds -- dead or alive -- and distilled
their timeless wisdom into specific suggestions for stocks, bonds and
funds you can buy today. Be warned: You just might get rich.
Read through this slideshow for timeless investment advice from 10 of the world's finest financial minds.
Jack Bogle: "Don't let the miracle of long-term compounding of returns be overwhelmed by the tyranny of long-term compounding of costs."
Sir John Templeton: "If you buy the same securities everyone else is buying, you will have the same results as everyone else."
Warren Buffett: "Whether socks or stocks, I like buying quality merchandise when it is marked down."
Nathan Mayer Rothschild: Information is money
Sam Zell: "Look for good companies with bad balance sheets and understand your downside."
Joseph Schumpeter: "A depression is for capitalism like a good, cold shower."
Peter Lynch: "Everyone has the brainpower to follow the stock market. If you made it through fifth grade math, you can do it."
Alexander Hamilton: "A nation which can prefer disgrace to danger is prepared for a master, and deserves one."
David Tepper: "I am the animal at the head of the pack. . . . I either get eaten, or I get the good grass."
Hetty Green: "All you have to do is buy cheap and sell dear, act with thrift and shrewdness, and be persistent."
Read through this slideshow for timeless investment advice from 10 of the world's finest financial minds.
Jack Bogle: "Don't let the miracle of long-term compounding of returns be overwhelmed by the tyranny of long-term compounding of costs."
Sir John Templeton: "If you buy the same securities everyone else is buying, you will have the same results as everyone else."
Warren Buffett: "Whether socks or stocks, I like buying quality merchandise when it is marked down."
Nathan Mayer Rothschild: Information is money
Sam Zell: "Look for good companies with bad balance sheets and understand your downside."
Joseph Schumpeter: "A depression is for capitalism like a good, cold shower."
Peter Lynch: "Everyone has the brainpower to follow the stock market. If you made it through fifth grade math, you can do it."
Alexander Hamilton: "A nation which can prefer disgrace to danger is prepared for a master, and deserves one."
David Tepper: "I am the animal at the head of the pack. . . . I either get eaten, or I get the good grass."
Hetty Green: "All you have to do is buy cheap and sell dear, act with thrift and shrewdness, and be persistent."
Friday, June 27, 2014
Buffett's biggest secret: cash
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.
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.
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.