Musings on the “400% Man”

Posted February 21, 2012 at 2:29 am

by David Merkel

When I read the following article at SmartMoney, I said to myself. “I have done almost as well, I am more diversified, and I am willing to explain more of what I do.”

Truth is, clever investors, or lucky investors can get an attitude, saying that they don’t have to explain themselves to outsiders.  Not a good place to be.  I am not saying that the performance is due to luck but there is a certain amount of respect due to investors for investing with you.

Before I write more, let me state that I respect Allan Mecham.  He manages more money than I do, and has a better track record.  If I were in the shoes of the investors who were analyzing him, I probably would have placed $5 million with him, and would have watched what he did carefully.

Why would I take the risk?  It’s tough to find non-consensus views that make significant money.  I wouldn’t want to make it a huge allocation initially, but I would put a toe in the water to see what he would actually do.  If it didn’t work over 5 years, I would pull the plug.

All that said, when you run a very concentrated portfolio, it is possible for a few decisions to [continue]…

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The beliefs that make a successful trader

Posted February 16, 2012 at 1:59 am

by Janice Dorn

“One bright day in the middle of night two dead boys rose to fight. Back to back they faced each other, drew their swords and shot one another. A deaf policeman heard the noise, and saved the lives of the two dead boys. If you don’t believe this lie is true, ask the blind man, he saw it too…” -Unknown

We are hard-wired to believe and hold to these beliefs, often in the face of contradictory evidence. In life outside the markets, this may achieve many purposes and actually be a source of strength. This does not, however, serve a trader well.

One of the most important questions for the trader to ask every day is “What do I believe that is not true?” And how do we know the truth? The markets tell us. It really is that simple, and yet so difficult for most to accept and practice on a daily basis.

It is important for a trader to assess beliefs regularly, because at any given market moment, the trader is [continue]…

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Stocks that deliver high returns on equity

Posted February 15, 2012 at 1:35 am

by David Parkinson

What are we looking for?

Forget the fuss over whether you should pursue a growth strategy or a value strategy in your investment portfolio.

In the aftermath of the Great Recession, says Brockhouse Cooper global macro strategist Pierre Lapointe, both strategies are being trumped by “quality” – stocks that deliver high return on equity, low volatility and clean balance sheets.

Mr. Lapointe says that the best returns over the past three years have had little correlation to stock price-to-earnings valuations (the value approach) or to earnings growth expectations (the growth approach). Rather, the top-quality stocks – regardless of whether they fit the growth or value mould – have substantially outperformed the MSCI U.S. Growth and MSCI U.S. Value indexes.

Today, with Mr. Lapointe’s help, we go in search of the highest-quality stocks on the S&P 500.

The quality screen

Mr. Lapointe devised a screen for stock quality that centres on return on equity (ROE) – annual net income expressed as a percentage of total shareholder equity. It essentially measures the [continue]…

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Stocks always kick ass over time…

Posted February 10, 2012 at 2:56 am

In an adaptation from his upcoming shareholder letter, the Oracle of Omaha explains why equities almost always beat the alternatives over time.

by Warren Buffett

Investing is often described as the process of laying out money now in the expectation of receiving more money in the future. At Berkshire Hathaway (BRKA) we take a more demanding approach, defining investing as the transfer to others of purchasing power now with the reasoned expectation of receiving more purchasing power — after taxes have been paid on nominal gains — in the future.

More succinctly, investing is forgoing consumption now in order to have the ability to consume more at a later date.

From our definition there flows an important corollary: The riskiness of an investment is not measured by beta (a Wall Street term encompassing volatility and often used in measuring risk) but rather by the probability — the reasoned probability — of that investment causing its owner a loss of purchasing power over his contemplated holding period.

Assets can fluctuate greatly in price and not be risky as long as they are reasonably certain to deliver increased purchasing power over their holding period. And as we will see, a nonfluctuating asset can be laden with risk.

Investment possibilities are both many and varied. There are three major categories, however, and it’s important to understand the characteristics of each.

So let’s survey the field [continue]…

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How to buy cash-rich, patent-holding companies

Posted February 9, 2012 at 3:40 am

via The Dividend Monk

This is the third in a series of articles highlighting dividend companies that have large and durable economic advantages, or “moats”, that protect their business operations and allow years or decades of strong profitability.

When looking for long-term investments, one typically wants to find a business that is performing well not simply because management is on top of their game right now, but rather because the business itself has fundamental and difficult-to-replicate advantages over its competitors.

In the last two articles, examples of unrivaled economies of scale and particularly powerful brands were provided.

Some companies keep competitors away by patenting their products. This gives them a number of years where they can get all of their research and development to pay off with nice profit margins.

If a company is big enough, they can successfully layer or ladder dozens, hundreds, or thousands of patents so that at any given time, only a subset of their patents are expiring, and new ones are replacing them. That way, most of the product portfolio is continually refreshed with a strong set of patent shields.

When a company organizes hundreds or thousands of engineers and scientists, and then layers their products with patent shields, this creates a pretty formidable defense against competitors. Some of the largest patent-holding companies often buy companies just for their patents.

The following is a list of dividend-paying companies with good patent shields [continue]…

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This is one of the worst natural gas investments

Posted February 9, 2012 at 2:26 am

by Daniel Dicker

The worst investment in the world, the United States Natural Gas fund (UNG) has again revealed how cruddy it is by announcing a four-for-one reverse split as of Feb. 22.

Anyone who still holds this turkey expecting it to even approximate the price movement of natural gas should be convinced by this last move to get out of this horrible fund.

Futures-based ETFs start with a grave disadvantage in the ETF world: instead of using various groupings of stocks to replicate the movement in a sector, they must use futures contracts and over-the-counter swaps to try and capture the price movement of an underlying commodity.

While there may be a terrific appetite for investors afraid or unwilling to engage in the futures market to bet on prices of natural gas or crude oil, there is really no good way to represent these commodities like stocks. Most of these ETFs are programmed to fail.

UNG suffers from a further problem. With natural gas dropping for most of the last four years, an increasing skew of the price curve, called a [continue]…

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Making money by collecting art

Posted February 2, 2012 at 2:46 am

Interviewed by Tom Dyson, publisher, The Palm Beach Letter

Tom: Let’s talk about art. You’ve mentioned many times what a great investment it has been for you.
 
Mark: Are you sure that’s a door you want to open, Tom? I can talk forever about art collecting.
 
Tom: Yes, let’s hear it. I’m interested to know why art collecting? Why not cars, or antique dollhouses or something?
 
Mark: Fine art—paintings, drawings, and sculpture—has always held a special place in my heart, so it was a natural choice for me.
 
My art collection has enriched me in three ways: Buying it is a lot of fun—especially when you know you are buying it right. Owning it is a great pleasure. It enriches your life every time you look at it, and it tells your friends and people something important about you. Thirdly, it can make you richer.

My art collection, as a whole, has appreciated more than a million dollars. I wouldn’t care if it didn’t. I’d be happy if it simply maintained its value. But I made investing in art a hobby, and it paid off.
 
Fine art, like a number of other historically recognized collectibles, has a lot of the qualities you want in an investment: It’s a tangible asset, so it tends to appreciate during inflationary times. It’s portable, which is a very good thing in case you might want to disappear one day. It’s also private­—and by that I mean that you don’t have to report your transactions to the government. And finally, if you buy the right art it can appreciate—sometimes a great deal.
 
Tom: So what does a novice need to know before collecting?
 
Mark: The novice needs to know that, from a wealth-building perspective, there are different kinds of art.
 
First, you have what I call “decorator art.” These are pieces of art that simply fill a given space with color and texture, but will never appreciate. This is the kind of art you see in Las Vegas hotel lobbies and Caribbean resorts. “Decorator art” is a waste of time and money.
 
Commercial art is what you find in galleries. However, the quality of this art can vary widely—it all comes down to the dealer and his expertise.

While it’s true that some dealers peddle that “decorator art” I was talking about, there are also some fine art commercial galleries that cater to local artists, graduate students, the talented Sunday dauber, as well as fine art by recognized talent. Priced right, these artworks make a very good starting point for the fledgling collector.
 
Those small local galleries I was talking about is where you want to go when starting your collection. You can find oils, pastels, and drawings that are worth a few hundred dollars. Buying pieces like that is a good way to train your eye.
 
Investment-grade art is different. It hangs in major museums. The artist is already in the art books. He’s already a serious figure. His art isn’t going to disappear. Nor will its value. It might fluctuate, as all investments do, but the long-term trend is good, and you can be confident that over the long run it will maintain or increase its value.
 
When buying art for investment purposes, collectors need to understand that appreciation happens over a substantial period of time.

Unless an artist dies or is the subject of a 60 Minutes interview, collectors will cool their heels for a while before selling for a profit. However, studies show that high quality, investment-grade art is one of the top performers in terms of long-term return on investing.
 
Tom: Okay, so how does someone begin?
 
Mark: There are two methods. If you are new to art and aren’t sure what you like, you can begin by buying inexpensive art. I’m not talking about decorative art.

It won’t teach you anything. I’m talking about art that you might find at small galleries, local art shows, or antique shops. Buy the stuff you like, but don’t spend any more than a few hundred dollars on any individual acquisition.
 
As your taste improves—and it will improve—you may find that much of what you once admired is not so wonderful anymore. When that happens, you can sell it (for whatever you can) or give it away. Ask questions of the dealer every time you buy art.

If you meet the artist and like him, make friends. Gradually, your circle of contacts will improve and so will your eye. Eventually you will feel ready to venture into investment-grade art.
 
Tom: Sounds like a relatively slow process. Is there a better way?
 
Mark: Yes. You can begin with investment-grade art, but you have to do your homework and be patient. Start by trying to figure out what genres of art you like. Do you like landscapes? Do you like abstract art? Do you like portraits? Sculpture? It doesn’t matter.

Don’t let someone talk you into, say, abstraction, if you prefer portraits. Art and collecting are life-enhancing endeavors, first and foremost. There is investment-grade art of every kind.

The collector needs to figure out his personal tastes before acquiring. That is why museum visits, gallery openings, etc., are so important.
 
Find what type of art appeals to you. Then figure out what artists you like within that genre. Try to limit your interest to two or three artists to begin with.

Study the price history of those artists. Find out what their pieces have sold for in auction in the past. Find out what they are selling for currently. Try to become an expert in their work as quickly as you can.

You don’t need to take any art appreciation courses. Just read books about the artists and the genres you like. You should also visit museums whenever you can and study the work of your preferred artists. When you have studied a thousand paintings, you will have developed your eye. You will know what you like. And more importantly, you will have a sense for quality.
 
You don’t want to start off spending lots of money. This can lead to costly mistakes. Begin by buying inexpensive pieces such as sketches from major artists (expect to pay $1,500 and upwards) and gouaches and paintings of second-tier investment-grade artists ($2,500 to $7,500). This sort of buying will keep your risk relatively low, so if and when you do make the occasional mistake (like buying a fake or overpaying for a piece), it won’t break you.
 
When I first got started, one of the things I got involved with was a school of art called CoBrA. CoBrA is an acronym for Copenhagen, Brussels, and Amsterdam. It was a period of art that officially took place from 1948-1952. It had a total of 10 or 12 artists in it, of which there were three major artists: Appel, Corneille, and Jorn. All of these artists hang in the major museums in the world.

I knew their art would never be worthless. This was a good group to begin with because it was small. It took place over a small period of time, it comprised a small number of artists, and each of them was recognizably different.

In other words, it was easy to study. So I began by collecting these three artists. I bought sketches and crayon pieces at first because they were cheap, and afterwards I sold some of them at a profit and “traded up.” Eventually, I was able to purchase a very nice collection of good pieces that have appreciated over 300%.
 
Tom: Okay, so let’s say I’ve done all that. I’ve picked my genre and my artists, I’ve spent months pouring over paintings and visiting museums. When I’m ready to buy, how do I know what’s a fair price, or how to value a piece of art?
 
Mark: That’s actually easy. But you have to ignore what the pundits say. Art pundits say that valuing art is impossible because it’s subjective. That is true in terms of the pleasure you get from art but it is not true of the investment value of art.
 
From an economic perspective, art is valued by the marketplace, just as stocks are. An artist’s work is valuable because important critics at some point decided it was good. Because of that, it went to the big museums. It got into books. It is taught in art courses. And when it goes to auction, people bid it up.
 
Once there’s a ten- or twenty-year market for a particular artist, the value of his art is unlikely to collapse. By that time, so many people—museums, brokers, and wealthy collectors—are invested in it. None of them, if they can help it, will allow it to collapse.
 
Who is ever going to say that Rembrandt wasn’t a great artist? Or that his paintings aren’t worth millions of dollars? Nobody. That doesn’t mean he was the best Dutch painter of his time. If you look at paintings by his contemporaries you might think that some of the other Dutch masters (or even a few of the minors) were just as good. But Rembrandt’s values will hold.

Why are his paintings worth a hundred times more than another one that is technically just as good? Because history has decided it should be so. Art critics—experts, people who dedicated their lives to studying art, have decided. The marketplace has put a value on it, and that’s what makes it more valuable.
 
When you’re collecting art, you’re collecting the history of what art critics have decided. You might disagree with them on an aesthetic basis, but you’d be foolish to disagree with them with your money.
 
My point is that the value of art, from an investment point of view, is not subjective at all. It is objective. More objective and easier to predict, in fact, than stocks.
 
You can read the conclusion of this interview here.

Editor’s Note – If you liked this free essay, you’d probably enjoy the private member content of The Palm Beach Letter. You’ll get our latest research on the safest stocks and wealth-building strategies that you won’t read or hear about anywhere else. You’ll also get instant and unlimited access to all of our special research reports. For more information, and to see if this opportunity is right for you, click here.

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Twenty common sense investing rules

Posted January 24, 2012 at 3:44 am

by Joshua Brown

I get a lot of inquiries about investment help from people that aren’t suitable for what I do or people who simply don’t yet meet our minimums.  

I hate having to turn folks away, especially loyal readers or people that truly need assistance and can’t find anywhere to get it in an unbiased way.

So with that in mind, I’m laying out my Twenty Common Sense Investing Rules.  

Please understand that these are not intended to be taken as Iron Law applicable in all situations nor are they meant to be specifically geared toward any one person.  

This list of rules is simply my accumulated common sense, learned in victory and defeat (lots of defeat) and it can be applied to a plain vanilla portfolio within one day.

The below is for ordinary investors, not professional traders or those aspiring to become professional traders [continue]…

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The right mix of assets via these perfect portfolios

Posted January 12, 2012 at 1:12 am

Stocks hit a five-month high on Tuesday, but pros still caution against making any major portfolio changes. Here’s what they do recommend.

via Smart Money

Someone living under a rock for a year might wonder why everyone lamented about the market’s “volatility.” The S&P 500 basically ended 2011 where it started, and 10-yearTreasurys are still paying near-record-low interest rates.

But that end-of-the-year calm masked 12 months where the market had a 25% up-and-down swing. Experts are generally predicting some stronger numbers from the markets and world economies for the year ahead, financial advisers are preparing for volatility to continue and taking steps to smooth out portfolios.

While investors will want to continue to look abroad for opportunities, experts say the U.S. could be the best place for safety in 2012. Domestic earnings are likely to continue to rise, while the U.S. job market should slowly improve, says Chris Hobart, chief executive officer of Hobart Financial Group in Charlotte, N.C.

“It’s like we’re the least dirty shirt in the dirty laundry,” he says. Every few weeks, SmartMoney checks in with financial planners about the right mix of assets for investors in different life stages.

Here are our latest recommendations [continue]…

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Why is successful long-term investing so difficult?

Posted January 10, 2012 at 3:38 am

by Martin Conrad

Studies of investor behavior tell us some surprising things about the decisions they make. Two results are particularly striking.

First, 85% of sell or exchange decisions are wrong — the investor would do better by doing nothing or going the other way that 85% of the time. Simple random decision making (with no investment knowledge) would have yielded about 50% good decisions.

The second result follows from the first one: In the 20 years ended 2008, a period that included the best decade of performance ever for stocks, the average stock-fund investor averaged only a 1.9% annual return (due to consistently poor buy and sell decisions) even though the average stock mutual fund returned 8.4% annually over the same period. With compounding, the difference was about ninefold (402% vs. 46%) over 20 years.

This is a compelling demonstration of the illusion of control, the mistaken belief that better results come from more-direct, detailed control and using it to make lots of decisions and transactions.

Investors are not particularly stupid or ignorant people, but they did make millions of stupid investment decisions with horrible consequences. How to explain such remarkable effects?

More generally, why is successful long-term investing so difficult? [continue]…

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