Archive for the ‘Investments’ Category

Gotcha: Fund managers charging more … for earning you less.

May 29, 2013

Burton Malkiel – one of my thesis advisers at Princeton –  has long touted index funds since individual stock movements are are tough to predict and since index funds outperform most actively managed funds.

He details his case in todays’s WSJ editorial “You’re Paying Too Much for Investment Help”

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Here’s the essence of Malkiel’s argument …

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Buffett serves up some McNuggets on NPR …

November 29, 2012

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

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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.
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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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Apple stock tumbling … You may be surprised how much YOU own !

April 17, 2012

Apple’s stock has lost about 9% of its value since hitting its most recent all-time high of $644, and is on a week-long skid.

Even if you don’t own any AAPL sahres outright, if you’re holding any mutual funds or ETFs, you probably own a boatload.

For example, if you’re holding the PowerShares QQQ (QQQ), you’re holding a big slice of Apple … 17.5% is in AAPL/

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What’s the top holding in the SPDR S&P 500 (SPY)?

You guessed it, APPL …4.37% of the SPY

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Ditto for many of the most popular mutual funds.

For example, APPL is almost 10% of Fidelity’s Contrafund.

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A couple of other biggies:

  • Fidelity Magellan (FMAGX) … top stock … 6.24%%
  • American Funds Growth Fund of Amer A (AGTHX) … top stock … 4.85%

You get the picture, right?

Two major takeaways:

First, If you’re holding any popular ETfs or mutual funds — individually or in, say, 401-Ks — then you probably own a bunch od Apple.

Even more important, so many big dogs — ETFs and mutual funds — are so heavily invested in Apple that, as Apple goes, so will the market.

I’m surprised that more hasn’t be written about about Apple’s influence on the total stock market.

You might want to start worrying

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Buffett: Rock Star of American Capitalism …

September 21, 2009

A summary of a gushing biography of the Oracle from Omaha …

Excerpted from Knowledge@Emory,  Buffett: Rock Star of American Capitalism, September 16, 2009

Warren Buffett’s rock star status is evident from the fact that each year tens of thousands of fans from all over the world travel to Omaha, Nebraska, to listen to him speak at his company Berkshire Hathaway’s shareholder meeting.

Alice Schroeder’s insightful biography titled, The Snowball: Warren Buffett and the Business of Life … seeks to explain how Buffett became one of the world’s richest men and why he is admired for his business ethics and for uniquely pledging most of his money to philanthropy.

Buffett’s annual letters to shareholders … analyze good and bad businesses, give examples of managers who treat customers and employees fairly while also making good profits, and expose accounting tricks that fool many investors. One of Buffett’s letters pointed out that rich people like him should be made to pay a higher tax rate than wage earners like his secretary.

Buffett’s most important act has been to donate much of his wealth to the Gates Foundation, to be spent over 20 years mainly on health care and education. As he states: “The idea of passing wealth from generation to generation so that hundreds of your descendants can command the resources of other people simply because they came from the right womb flies in the face of a meritocratic society.” Also, unlike most other philanthropists, Buffett has not set up a foundation nor paid for buildings at hospitals or museums to try to perpetuate his name.

Rational Money Machine

Buffett had spent $15.4 million to buy 46% of Berkshire, With Berkshire stock recently around $87,200, Buffett has grown his wealth nearly 3,000-fold in some 30 years.

This massive capital accumulation is based on an investment discipline he learned from Benjamin Graham. Buffett’s approach to investment involves using seventh grade math and common sense to analyze a company’s underlying economics; buying a business not a stock; ignoring the fluctuations of the stock market; and, most importantly, maintaining a margin of safety. Of course, the mathematical magic of compounding gains over time have also helped Berkshire Hathaway multiply its wealth.

Buffett’s three rules of portfolio management are: 1) Don’t lose money; 2) Don’t forget rule one and 3) Don’t go into debt.

He attracts talented people to work, partner and deal with him due to his honesty, fairness, letting them do their job without interference and crediting them for success.

Right Side of the Edge

Buffett criticizes the high fees charged by investment managers, especially of hedge and private equity funds. Yet, Buffett himself accumulated much of his initial capital from the fees he charged a hedge fund-type partnership, pocketing half the gains over 4%.

Some of Buffett’s investments for his partnership were also made based on the expectation that managements would buy back his stock at a higher price. In

Buffett has argued for the expensing of stock options, which many chief executives liberally give as incentives and bonuses to themselves, other managers and employees. Only in 2002, going against the views of most CEOs, Buffett found the time was right to push Coke’s board to make it the first major company to expense stock options. 

Buffett draws a token $100,000 annual salary from Berkshire and awards himself or other managers no stock options, grants or warrants.

Personal and Family Life

Buffett owns no fancy houses, cars or yachts. He wears cheap clothes, craves hamburgers, French fries and cherry Coke and appears awkward in social situations. Buffet also spends hours playing bridge online, enjoys golf, handball and table tennis and plays the ukulele. He is a showman who avoids confrontation and hides his true opinions behind coy remarks, if being blunt may hurt his business or other relationships.        

Since Buffett was consumed with his work, he had little extra time for his wife and three kids. “While he was friendly with his kids, he hadn’t really gotten to know them” while they were growing up at home in Omaha. On occasion Buffett’s secretary blocked even his family’s access to him, not on explicit but on implicit orders, a typical Buffett method of operating.

His wife wanted him to stop being consumed with making more money once he had made his initial millions. His actions that led his wife to leave their home in Omaha are the major regret of Buffett’s life: “If you get to my age in life and nobody thinks well of you, I don’t care how big your bank account is, your life is a disaster.”

Unlike most other capitalists, Buffett believes that children should not inherit money just because of the lottery of their birth. He says children should be left “enough money so that they feel they could do anything, but not so much that they could do nothing.”

Buffett’s views:  capitalists: should give their money back to society, to which he believes they owe their wealth in the first place,

“Buffett always avoided or limited his time with anyone he feared might criticize him.”

As Buffett has often noted, the American economy in the second half of the twentieth century provided the ideal environment – lots of wet snow and a long hill to roll and grow his snowball — for someone of his skills, temperament and personality to become immensely wealthy.

Full article:
http://knowledge.emory.edu/article.cfm?articleid=1267

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Is the “Oracle of Omaha” over-rated ?

September 21, 2009

cnbc.com, 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:
http://www.cnbc.com/id/32841601/site/14081545

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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.

http://money.cnn.com/2009/08/03/news/companies/bank_of_america_sec/index.htm?postversion=2009080315

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.

Hmmm.

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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Analysts say GE’s dividend is threatened … huh?

January 29, 2009

Disclaimer: I’m biased — I own a bunch of GE stock and want it to do well.

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Wall Street analysts are all over GE because of  its dividend policy: it uses cash and the yield is very high at the stock’s current price (approximately 10%).

With a little over 10 billion shares outstanding, the annual dividend payout is about  $14 billion.

But, GE estimates about 40% of its shareholders are retail investors who count on the dividend.

And, analysts estimate that retail investors annually reinvest $4 billion to $5 billion of their dividends in the company’s DRIP

So, the net cash outflow is under $10 billion annually … and, oh yeah,  the company is sitting on $48 billion in cash (end of Dec) — up from $16 billion (end of Sept.)

I must be missing something … 

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Reference:
http://www.thestreet.com/story/10459290/1/ge-dividend-a-cause-for-concern.html?puc=_cnnmoney&cm_ven=CNNMONEY&cm_cat=Free&cm_pla=Feed&cm_ite=Feed
 

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Investor alert: Dump stocks, buy comic books …

October 6, 2008

Excerpted from WSJ: ” When Stocks Tank, Some Investors Stampede to Alpacas and Turn to Drink”,  Oct.3, 2008   

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Investors have long turned to hard assets in market downturns, the idea being that if you invest in something real, it won’t disappear, even if its value declines. But analysts say this downturn is different in that real estate, the most traditional safe haven, is also sinking.

Given the gyrations in the financial markets, some investors are abandoning stocks and bonds and seeking refuge in unusual alternatives — parking spaces, for instance, and condos in Peru. Sales of exotic livestock are up. The U.S. Mint has seen a gold-coin rush.

A man in Atlanta, recently bypassed the stock market for liquid assets — $120,000 in champagnes. He bought 400 bottles, mostly 1996 vintage, that he says he plans to “sit on” for 10 or 15 years and then sell at a profit.   “The worst thing that could happen is that I drink all of it.”

Another man did invest in real estate, but not the usual sort. He became landlord of a single parking space in Chicago. He bought a 12-by-20-foot spot in the Field Harbor Parking Garage for $29,000 and rents it out. “The stock market is indicative of a lot of uncertainty. With a parking space, at least you end up with something,” he says.

An auditor in Johnstown, Pa., turned to an unusual farm animal. “I’ve lost a fortune in stocks, and my 401(k) is falling through the floor. I feel comfortable in alpacas,” she says. She invested $56,000 in a small herd that she believes has a better outlook than most mutual funds because of the animals’ breeding potential.

Financial firms are reporting that a growing number of retirees are rolling their money out of ordinary individual retirement accounts — commonly stocks, bonds and mutual funds — and into self-directed IRAs, where almost anything goes. “We’ve had people invest in a cypress farm in Costa Rica, and a condo in Croatia.”

A retired engineer, says he pulled his entire nest egg of nearly $1 million out of stock and bond funds in August and put it into a self-directed IRA. He invested some of the money in his niece’s company — which is building condos in Lima, Peru.  “I can see pictures of the land. I can see steel. I can see people working. When I put my money in a fund, I see a big list of things that don’t sound good.”

In past market downturns he saw people turn to chinchillas, worm farms and super-breeds of rabbits. Emus, too, were big. “Eventually, people got tired of them and just let them go,” he says. “To this day, you’ll be in West Texas and a big emu running wild will just come up next to your car.”

Hard-asset gurus have been advising people to buy bags of pre-1965 U.S dimes and quarters, which are 90% silver and in limited supply.

Some stock-market investors also are turning to superheroes. “There’s kind of a buying frenzy” in vintage comic books. The “Silver Age Comic Book Pricing Index” of 32 frequently traded ’60s comics, was up 14.2% in the 18 months ending in July, while the Standard & Poor’s 500 stock index was down 11%. “Spiderman is going to be here in 20 years — he’s not going away,”

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Full article:
http://online.wsj.com/article/SB122298871817500225.html

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