Archive for the ‘Investing’ Category

Whew! At least I don’t own Apple stock…

January 4, 2019

Ouch: Make that: I don’t own Apple stock directly.

Except for a couple of legacy stocks, I shy away from individual company stocks.

My history has been dismal when I’ve tried to pick individual stocks. I either buy at the peak … or, hold winners until they become losers.

So, my equity investments tend to be in broad market ETFs and low-cost mutual funds.

I used to think that they insulated me from wild swings in individual stock prices.

If true, yesterday’s steep drop in Apple should have been lost in the round.

Not so, as evidenced by the hammering that the Dow and S&P took yesterday.

One analysis I saw indicated that Apple was directly responsible for over 15% of the Dow’s decline … and indirectly responsible for the rest … either by dragging other tech stocks with it, or by seeming to be a leading indicator of economic troubles ahead.


For example, consider the SPY ETF…


Buffett serves up some McNuggets on NPR …

November 29, 2012

Warren B. was waxing on NPR about investments and the economy.


I listened to the podcast, expecting to scream when he started whining about his taxes being too low.

He didn’t, so I didn’t.

Below are some punch lines and a link to the audio of the interview.

Why the stock market is still hanging on …

October 15, 2012

The economy is sluggish, corporate guidance has turned a bit bearish, but the stock market is still at high levels.

What’s up?

Well, broadly speaking, it’s the QE3 effect – the Fed is flooding the marketing with money again, keeping interest rates low.

Remember the low interest rates may be good for borrowers, but are awful for investors looking for more-or-less fixed incomes with some modicum of security.

More specifically, starting in 2011, benchmark Treasury rates (e.g the 5-year T-Bond) have been below the broad market dividend yield – represented by the S&P 500 Dividend yield’.


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And, the spread has been widening recently – in favor of stock dividends


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Bottom line: money flows to the best returns … it’s basic finance.

Thanks to SMH for feeding the lead

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According to investment guru Burton Malkiel …

March 29, 2012

In a recent WSJ op-ed,  Burt Malkiel stopped random walking and cut to the chase re: the near-term economic climate and  investment options. 

Malkiel says:

The economic data, as a whole, suggest the economy is growing at a rate nearer to 2% rather than its previous trend rate of 3%-4%.

  • The strong employment gains may well have been aided by our unusually warm winter.
  • Rising gasoline prices will put increased pressure on consumers. And a number of strong economic headwinds still exist.
  • The economies of the euro zone are getting worse, not better.
  • The housing sector has yet to make a convincing turn for the better.

Given the present economic outlook, let’s look at three asset classes ranked them from worst to best – bonds, equities, and real estate.

Bonds are the worst asset class for investors.

Usually thought of as the safest of investments, they are anything but safe today.

At a yield of 2.25%, the 10-year U.S. Treasury note is a sure loser.

Even if the overall inflation rate is only 2.25% over the next decade, an investor who holds a 10-year Treasury until maturity will realize a zero real (after-inflation) return.

Even if the inflation rate remains moderate, interest rates are likely to rise to more normal levels as the economy continues to recover.

Given the likely trends, U.S. Treasurys and high quality bonds are likely to be extremely poor investments and are very risky.

Equities on the other hand are still attractively priced.

Despite their substantial rise from the October 2011 lows.

A good way to estimate the likely long-run rate of return from common stocks is to add today’s dividend yield (around 2%) to the long-run growth of nominal corporate earnings (around 5%).

Equity returns should be about 7% — five percentage points more than the safest bonds.

This five-percentage point equity risk premium is close to the historical average.

In other words, while equities appear to be favorably priced relative to Treasury bonds, returns are unlikely to be at the double-digit level enjoyed from 1982 through 1999.

Real estate is a particularly attractive asset class

Real-estate prices have fallen sharply, if not to their absolute lows, then certainly very near to them.

Long-term mortgages are below 4% for those who can qualify.

Housing affordability (a measure based on house prices and mortgage rates) has never been more attractive.

Housing has been a dreadful investment since the housing bubble burst in 2007.

I believe it will be one of the best investments over the next decade.

In today’s environment, the minimization of investment fees is more important than ever.

A 1% investment management fee may appear to be very low when measured against assets.

But when measured against a 7% equity return, that fee represents more than 14% of the return.

Against a 2% dividend yield, the fee absorbs one half of the dividend income.

The only way to ensure that you can enjoy top quartile investment returns is to choose investment funds that have bottom quartile expense ratios.

During 2011, over 80% of actively-managed equity funds were outperformed by the broad-based S&P 1500 Stock Index.

Investors can’t control returns generated by world financial markets.

But, they can control is fees paid to investment managers.

And, the quintessential low-expense instruments are broad-based, indexed mutual funds and ETFs.

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Personal note: My very first class at Princeton was Econ 101 taught by Burton Malkiel. He was one of the “inspirers” for my majoring in economics. 

As a senior, he was one of my thesis graders … gave me an A, then wrote a Journal of Finance article debunking my findings.  Ouch.

Still think he’s a great economist and a great guy.

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Burt Malkiel is still walking randomly …

November 23, 2010

Prof. Burton Malkiel has always been one of my heroes. 

He was the prof in my very first lecture in college.  I’d never heard of him since I’d just fallen off the pumpkin truck, but even I knew the guy was something special.

Four years later he was a “reader” on my college thesis.  He gave me an “A”, then wrote an article debunking my thesis.  That’s OK. If I’m going to get trashed, I want somebody of his stature doing the trashing.

Many people have heard of Prof. Malkiel because of his book “A Random Walk Down Wall Street”.  His central idea: if you try to time the market and beat the pros, you’re nuttier than a fruitcake.

Some consider Prof. Malkiel’s corrollary principles like ‘buy & hold’ and ‘portfolio balancing’ to be passe.

In a WSJ op-ed, he argues that they’re still alive and well, and can make you prosperous.

Here are some highlights …

In the wake of the recent financial crisis, many investors believe that the traditional methods of portfolio management don’t work anymore.

They think that “buying and holding” is outdated, and that success depends on skillful timing.

Diversification no longer works, they argue, because all asset classes move up and down together, especially when stock markets fall. In other words, diversification fails us just when we need it most.

And they suggest that low-cost, passively managed portfolios are no longer useful, that today’s difficult investment environment requires active management.

I don’t agree with any of these arguments. The timeless investment maxims of the past remain valid. Indeed, their benefits may be even greater today than ever before.

While no one can time the market, timeless techniques can help:

  • Dollar-cost averaging,” putting the same amount of money into the market at regular intervals, implies investing some money when stocks are high, but also ensures some buying at market bottoms. More shares are bought when prices are low, thus lowering average costs.
  • The other useful technique is “rebalancing,” keeping the portfolio asset allocation consistent with the investor’s risk tolerance. Rebalancing involves selling some of the asset class whose share is above the desired allocation and putting the money into the other asset class. .
  • Diversification has not lost its effectiveness. Over the past several years, when stocks went down, bonds went up, preserving the value of the portfolio. And while stock markets around the world have tended to rise and fall together, there were huge differences in regional returns.
  • Also, low-cost passive (index-fund) investing remains an excellent strategy . The evidence is clear. Low-cost index funds regularly outperform two-thirds of actively managed funds, and the one-third of actively managed funds that outperform changes from period to period.

If you ignore the pundits who say that old maxims don’t work and you follow the time-tested techniques espoused here, you are likely to do just fine, even during the toughest of times.

WSJ, ‘Buy and Hold’ Is Still a Winner, Nov 18, 2010

Is the “Oracle of Omaha” over-rated ?

September 21, 2009, The Oracle of Oma-Hype? , Sep 14, 2009

Clint Goodrich …  went from horse racing to futures trading—both occupations require focus and brutal tenacity. He  trades for some high net worth clients. His investments have averaged 22 percent gains a year over the last five years, and while he took a beating in the fourth quarter last year (who didn’t?), this year he’s up nearly 32 percent.

Goodrich thinks Buffett isn’t much of an oracle:

I think Warren Buffett is overrated. My thinking is a collective of many years of watching and listening to everyone in the media lionize this guy. As a trader and manager of money, I follow the money, literally. Clearly he’s not some stooge. He’s been successful, is shrewd and lived in the same Omaha house since 1955. However, a few simple insights into his track record leave me a little cold and not so convinced about his title “World’s Greatest Investor”.

If you bought one share in BRK.A at the “open” on Sept 10, 1999 you spent $62,500. On Sept 9, 2009 that same share was worth $97,900 on the “open”, an increase over 10 years of $35,400 (+56.64 percent appreciation), or an average simple return of +5.66 percent per year. To me, this is historically just a reasonable rate of return on a 30-year U.S. Treasury Bond, and certainly a less than spectacular rate of appreciation for someone titled “The World’s Greatest Investor”. Oh, and by the way, a 30-year U.S. Treasury is guaranteed.

Mr. Buffett is that he demonizes traders and calls derivatives “weapons of financial mass destruction”, when he himself holds some of the largest derivative positions in the world! It’s OK for him to hold derivatives but not others?

He missed the tech run, he lost billions in his US dollar position, and he apparently had no inkling of the financial crash that swept the markets in the fall of ’08 through the spring of ’09.

In general, he’s a buy and hold forever guy with a seemingly blind eye to taking profits and looking for the next opportunity. What is up with not letting go of a position, taking the profit and moving on?

Of course, the weak point in my argument would be, that so far…..he has more money than I do. But hey, that’s what makes a market!

Full post:

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A stock-market crash is akin to an automobile crash … and other ways to cope with losing money

August 31, 2009

Excerpted from WSJ: The Mistakes We Make—and Why We Make Them. Aug. 23, 2009

Most investors are intelligent people, neither irrational nor insane.

But behavioral finance tells us we are also normal, with brains that are often full and emotions that are often overflowing. And that means we are normal smart at times, and normal stupid at others.

The trick, therefore, is to learn to increase our ratio of smart behavior to stupid. And since we cannot (thank goodness) turn ourselves into computer-like people, we need to find tools to help us act smart even when our thinking and feelings tempt us to be stupid.

  • Investors tend to think about each stock we purchase in a vacuum, distinct from other stocks in our portfolio. We are happy to realize “paper” gains in each stock quickly, but procrastinate when it comes to realizing losses.Why?

    Because while regret over a paper loss stings, we can console ourselves in the hope that, in time, the stock will roar back into a gain. By contrast, all hope would be extinguished if we sold the stock and realized our loss. We would feel the searing pain of regret. So we do pretty much anything to avoid that pain—including holding on to the stock long after we should have sold it. Indeed. 

    Successful professional traders … establish “sell disciplines” that force them to realize losses even when they know that the pain of regret is sure to follow.

  • Goldman Sachs is faster than you. individual investors should never enter a race against faster runners by trading frequently on every little bit of news (or rumors) … Instead, simply buy and hold a diversified portfolio. Banal? Yes. Obvious? Yes. Typically followed? Sadly, no. Your ability to predict next year’s investment winner is no better than your ability to predict next week’s lottery winner. A diversified portfolio of many investments might make you a loser during a year or even a decade, but a concentrated portfolio of few investments might ruin you forever.
  • Wealth makes us happy, but wealth increases make us even happier.John found out today that his wealth fell from $5 million to $3 million. Jane found out that her wealth increased from $1 million to $2 million. John has more wealth than Jane, but Jane is likely to be happier. This simple insight underlies Prospect Theory, developed by Daniel Kahneman and Amos Tversky. Happiness from wealth comes from gains of wealth more than it comes from levels of wealth. While gains of wealth bring happiness, losses of wealth bring misery.
  • A stock-market crash is akin to an automobile crash. We check ourselves. Is anyone bleeding? Can we drive the car to a garage, or do we need a tow truck?

    We must check ourselves after a market crash as well. Suppose that you divide your portfolio into mental accounts: one for your retirement income, one for college education of your grandchildren, and one for bequests to your children.

    Now you can see that the terrible market has wrecked your bequest mental account and dented your education mental account, but left your retirement mental account without a scratch. You still have all the money you need for food and shelter, and you even have the money for a trip around the country in a new RV.

    You might want to affix to it a new version of the old bumper sticker: “I’ve only lost my children’s inheritance.”

  • Ask yourself whether the market damaged your financial security or only deflated your ego. If the market has damaged your financial security, then you’ll have to save more, or spend less.But don’t worry about your ego. In time it will inflate to its former size.

Full article:

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An irony of SEC fines … double jeopardy for shareholders ?

August 26, 2009

The story

Gotcha: “B of A to pay $33M fine over Merrill bonuses”

On August 3,  the Securities and Exchange Commission filed charges  against Bank of America for misleading investors about billions of dollars in bonuses paid to top executives at Merrill Lynch following its purchase of the brokerage giant.

The SEC simultaneously announced that it would settle with the Charlotte, N.C.-based lender, who will pay a penalty of $33 million as a result.

Regulators alleged that Bank of America failed to disclose plans to as much as $5.8 billion in bonuses for fiscal year 2008 in its proxy statement. Instead, Bank of America told shareholders that Merrill had agreed not to pay year-end performance bonuses, according to the SEC.

“Failing to disclose that a struggling company will pay out billions of dollars in performance bonuses obviously violates that duty and warrants the significant financial penalty imposed by today’s settlement,” Robert Khuzami, Director of the SEC’s division of enforcement, said in a statement.

The Question 

Who really pays fines imposed by the SEC?

Think about it …

B of A misleads shareholders by failing to disclose material information.

Shareholders lose money as B of A stock drops.

SEC fines B of A for misleading shareholders.

B of A pays a fine to the SEC.

Where did the fine’s funds come from?

You guessed it, shareholder’s equity.

So, in the final analysis, shareholders pay a fine for having been mislead.

… and I thought double jeopardy was illegal.


Note: This one is even more interesting since taxpayers own a chunk of B of A.

So, taxpayers are paying a fine to themselves.

Our government at work …


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Ups & downs … Keep Your Money in the Market

October 13, 2008

Excerpted from WSJ: “Keep Your Money in the Market”, Burton Malkiel, Oct. 13, 2008

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As the world economy reels under the weight of the worst financial crisis since the Great Depression, we have been left with a broken financial system. Financial institutions around the world have suffered life-threatening, self-inflicted wounds by purchasing over a trillion dollars of complex mortgage-backed securities backed by dodgy loans based on inflated real-estate values.

These assets have been financed with enormous leverage and with short-term debt. Just prior to its “rescue,” Bear Stearns had a debt to equity ratio of over 30 to 1, making it susceptible to a “run on the … shadow banking system” built on derivatives.

The long-run solution to the present crisis must involve substantial deleveraging and a recapitalization of our financial institutions. In the meantime, credit has been essentially frozen and a world-wide recession seems almost inevitable.

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Investors should not panic. The best position for investors today is not “fetal and 100% in cash.”

We are not going to have a depression, and we have survived financial crises before.

A century of investing experience, as well as insights from the field of behavioral finance, suggest that investors who bail out of equities during times like these are almost always making the wrong decision.

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By all means, young 401(k) investors, and those in their prime earnings years, who are stashing away funds from every monthly paycheck, should stay the course. If you decide to eschew equities during periods of ubiquitous pessimism, you will lose all of the advantage of “dollar cost” averaging (buying more shares when prices are low than when they are high). Asset allocations should be shifted to safer securities over time as the investor ages, but only gradually and on a set schedule as through a “target maturity fund.”

If you are now approaching retirement and failed to move to a more conservative asset allocation, you should not do so now in response to a time of panic. If anything, well diversified investors should, at the end of each year, consider rebalancing to ensure that your portfolio composition remains consistent with the risk level appropriate for your financial circumstances and tolerance for risk. But this is likely to mean shifting into equities and not out of them.

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We will have a serious recession now, but a 1930s-style depression is highly unlikely. We will not let the money supply decline by 25%, as we did in the ’30s, and automatic stabilizers (like unemployment insurance) are now a significant element of fiscal policy. Don’t forget that the U.S. economy is still the most flexible in the world and our “innovation machine” is alive and well.

No one has consistently made money by selling America short, and I am confident the same lesson is true today.

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Mr. Malkiel is a professor of economics at Princeton University and the author of “A Random Walk Down Wall Street,” … he was Ken’s Econ 101 prof, and a faculty reviewer of Ken’s thesis “Money & Stock Prices: An Econometric Study”

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Full article:

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