Posted November 9, 2010 at 9:02 pm
by Richard Russell
Dow Theory Letters
One of the most important lessons for living in the modern world is that to survive you’ve got to have money. But to live (survive) happily, you must have love, health (mental and physical), freedom, intellectual stimulation – and money.
When I taught my kids about money, the first thing I taught them was the use of the “money bible.” What’s the money bible? Simple, it’s a volume of the compounding interest tables.
Compounding is the royal road to riches. Compounding is the safe road, the sure road, and fortunately, anybody can do it. To compound successfully you need the following:
Perseverance in order to keep you firmly on the savings path. You need intelligence in order to understand what you are doing and why. And you need a knowledge of the mathematics tables in order to comprehend the amazing rewards that will come to you if you faithfully follow the compounding road. And, of course, you need time… time to allow the power of compounding to work for you.
Remember, compounding only works through time.
But there are two catches in the compounding process. The first is obvious – compounding may involve sacrifice (you can’t spend it and still save it). Second, compounding is boring – b-o-r-i-n-g. Or I should say it’s boring until (after seven or eight years) the money starts to pour in. Then, believe me, compounding becomes very interesting. In fact, it becomes downright fascinating!
In order to emphasize the power of compounding, I am including this extraordinary study, courtesy of Market Logic, of Ft. Lauderdale, FL 33306.
In this study we assume that investor (B) opens an IRA at age 19. For seven consecutive periods he puts $2,000 in his IRA at an average growth rate of 10% (7% interest plus growth). After seven years this fellow makes NO MORE contributions – he’s finished.
A second investor (A) makes no contributions until age 26 (this is the age when investor B was finished with his contributions). Then A continues faithfully to contribute $2,000 every year until he’s 65 (at the same theoretical 10% rate).
Now study the incredible results. B, who made his contributions earlier and who made only seven contributions, ends up with MORE money than A, who made 40 contributions but at a LATER TIME. The difference in the two is that B had seven more early years of compounding than A. Those seven early years were worth more than all of A’s 33 additional contributions.
This is a study that I suggest you show to your kids. It’s a study I’ve lived by, and I can tell you, “It works.” You can work your compounding with muni-bonds, with a good money market fund, with T-bills or say with five-year T-notes.
Posted October 14, 2010 at 11:43 pm
by Brian Hunt:
Question of the day: Should I diversify out of stocks and buy a “hard asset” commodity like crude oil?
Answer: “Go ahead buddy… But there’s actually no difference between stocks and oil.”
Many investors buy commodities thinking they’re “diversifying” their portfolios. But what they don’t realize is that often, commodities and stocks move in the same direction, at the same pace.
Today’s chart shows this idea at work…
Below is a “performance chart” of crude oil and the benchmark S&P 500 stock index. It plots the performance of both assets over the past year. Crude oil is the black line. Stocks are the blue line.
As you can see, oil and stocks are trading in lockstep with each other, according to expectations of global economic strength. So… buy stocks… or buy oil?
The market says, “What’s the difference?
Posted September 28, 2010 at 12:16 pm
by Charles Sizemore:
The difference between the “madness of crowds” and the “wisdom of crowds” can be summed up one one word: herding.
When investors think and act as individuals, the crowd is effective at establishing “correct” prices, and the market is efficient.
This is the beauty of a market economy. But when investors think and act as a herd, independent judgment is lost, prices lose their rationality, and assets get mispriced.
In extreme cases, we get bubbles and panics. But even under more mundane conditions we get relative mispricings as investors chase “hot” sectors and ignore others.
This is why, even after all these decades, the basic principles of value investing still work.
Unless the human race somehow evolves out of its tendency to herd, opportunities will exist for contrarians willing to go against the grain.
One of my favorite methods in tactical asset allocation is to look for signs of investor herding and take a contrary position. Herding can take many forms and can be done by…
Posted September 28, 2010 at 12:09 pm
by Wade Slome CFA CFP:
In the midst of the so-called “Lost Decade,” pundits continue to talk about the death of “buy and hold” (B&H) investing. I guess it probably makes sense to define B&H first before discussing it, but like most amorphous financial concepts, there is no clear cut definition.
According to some strict B&H interpreters, B&H means buy and hold forever (i.e., buy today and carry to your grave). For other more forgiving Wall Street lexicon analysts, B&H could mean a multi-year timeframe. However, with the advent of high frequency trading (HFT) and supercomputers, the speed of trading has only accelerated further to milliseconds, microseconds, and even nanoseconds.
Pretty soon B&H will be considered buying a stock and holding it for a day! Average mutual fund turnover (holding periods) has already declined from about 6 years in the 1950s to about 11 months in the 2000s according to John Bogle.
Technology and the lower costs associated with trading advancements is obviously a key driver to shortened investment horizons, but even after these developments, professionals success in beating the market is less clear.
Passive gurus Burton Malkiel and John Bogle have consistently asserted that 75% or more of professional money managers underperform benchmarks and passive investment vehicles (e.g., index funds and exchange traded funds).
This is not the first time that B&H has been…
Posted August 25, 2010 at 7:50 pm
by Margaret Collins:
Peter Kuhn, an investor from San Jose, California, who owns more than $1 million in municipal bonds, scours pricing websites and uses Zions Bancorporation’s online brokerage to avoid getting overcharged when he buys tax- exempt debt.
Consumers who aren’t as savvy may be paying more than they have to for state and local obligations in the $2.8 trillion U.S. municipal market, where individuals and mutual funds hold about two-thirds of outstanding securities. Firms selling to customers mark up the price an average $5 to $10 per $1,000 bond, or 0.50 percent to 1 percent, said Thomas Doe, chief executive officer of Municipal Market Advisors, a Concord, Massachusetts-based research firm.
Because tax-free yields are at their lowest levels in four decades and dealers have flexibility on pricing, investors have to be more careful to make sure the markup they’re being charged isn’t excessive, said Mitchel Schlesinger, chief investment officer at FBB Capital Partners.
“Do more homework to make sure you’re not getting ripped off,” said Schlesinger, who oversees $80 million in munis for the Bethesda, Maryland-based advisory firm. “You could easily give up a year of coupon income because yields are so low.”
Shrinking supplies of tax-free municipal debt and the lowest rates on U.S. Treasury 10-year notes in more than a year have driven down yields on 10-year and 30-year AAA general obligation bonds to the lowest levels since the 1960s, according to MMA’s Doe. The 10-year tax-exempt rate was 2.60 percent as of Aug. 24 and the 30-year rate was 4.16 percent, according to MMA’s indexes.
Posted August 18, 2010 at 2:21 pm
by Dyan Machan and Reshma Kapadia:
If the stock markets were a public beach, the red “high hazard” flags might still be flying over the lifeguard’s chair. Or at the very least, a strong yellow.
The summer has been calmer than the spring, but not by much, not with the foundering euro and stubborn unemployment at home offering daily reminders that global economic waters are still choppy. And the stock market remains as riptide-prone as ever.
According to Schaeffer’s Investment Research, the Dow is on pace to register 90 days this year with swings of 100 points or more—more than twice as many as in any of the three years before the crash.
As fund managers keep warning, many of last year’s top-performing stocks were risky or near-death companies that now are struggling once again. Small wonder that many mainstream investors remain anxiously on shore—collectively, Americans hold $9.4 trillion in cash, 27 percent more than in 2007.
Of course, where fearful investors see threatening surf, the most successful pros see big-kahuna waves that they can ride to profits.
We focused this year’s installment of “The World’s Greatest Investors” on four people who’ve proved they can make good money in stocks even in difficult times. And indeed, some were more upbeat after the market’s ugly summer tumbles than they were before it—after all, their favorite stocks were cheaper.
That said, these managers are anything but blasé about the rough market—and, for what it’s worth, none of them believes that new financial regulations will affect their portfolios much—yet.
With a combined 100 years’ investment experience among them, they’re being selective and disciplined as they decide which stocks are safe to own. Susan Byrne, a veteran of many decades in the mutual fund world, is moving into big conglomerates that pay fat dividends; Thyra Zerhusen likes smaller firms that dominate niche markets, especially in tech or industrials. International-investing specialist David Herro thinks the best way to ride out the market’s turmoil is to buy stocks in Europe—even though Europe instigated much of that turmoil.
And even the venerable Warren Buffett has been reshaping the sprawling Berkshire Hathaway empire to make it less vulnerable to the market’s unpredictable tides.
For more about how these proven veterans are balancing caution and opportunism, read on…
Posted July 14, 2010 at 11:29 pm
Via CNN Money:
At 82, T. Boone Pickens has worn multiple (10-gallon) hats: billionaire investor, corporate raider, hedge fund manager, and proselytizer for natural gas and wind — not to mention fervent Oklahoma State football fan. Through it all, though, he’s been an oil and gas man. He spoke with Fortune’s Katie Benner about the perils and possibilities of investing in energy during a time of tumult for the industry. Edited excerpts:
Why hasn’t the BP spill pushed oil prices higher?
Alot of oil is gushing from the blowout, but it wasn’t in the system to begin with, so it’s not like we’re losing supply. But prices could go higher. Goldman Sachs (GS, Fortune 500) and Morgan Stanley (MS, Fortune 500) are both predicting that oil [about $77 a barrel as of late June] will hit $100 next year, and you know that will force equities to move higher too. I think that’s a realistic projection because supply is capped at about 85 million barrels a day, and if we have any sort of global recovery, the only way to control the demand will be through price.
I would also mention the moratorium on drilling — whether or not it holds. Gulf of Mexico production isn’t that significant in the overall picture, but it matters at the margins, and every 100,000 barrels of oil or so affects the market. We had 34 rigs operating in the deep water, producing about 1.4 million out of the Gulf of Mexico’s daily 1.7 million barrels of oil.
Because it’s so complicated to stop and start production, a six-month ban will probably be more like 12 to 18 months. Even after we restart the wells, their capacity to produce will have declined by 25% to 35% over that time. This will also eventually move prices.
Are you worried about the political uncertainty that the Deepwater Horizon disaster has generated?
As far as stocks are concerned, this could mean a buying opportunity. As long as there’s political uncertainty around the energy space, stock prices will come down. But keep in mind that the midterm elections in November could erase that discount over time as political uncertainty resolves.
Would you buy BP stock, given that the price has fallen over 50% since the accident?
We don’t own the stock now, and I’m not sure if I’d be a buyer or a seller. There’s too much uncertainty about what will happen to the company. But it wouldn’t bother me to own the bonds. There’s a lot of value in the debt structure, and it would take a very large loss for bondholders to see their value eroded.
What about other energy stocks?
Posted June 11, 2010 at 12:38 am
by Andrew Hallam:
If you watch the stock market, the economy, and you think bad news is bad, you’re probably a lousy investor
I’m not going to make myself popular when I say this, but investing in the stock market is pretty easy. Long term, there’s an upward trend, so it’s a lot like gambling with the odds stacked very heavily in your favour.
The stock market has always been an easy place for me to make money— because I’m not very smart.
Most smart people make terrible investors. Here are four reasons why:
1. They watch market news, talk about the economy and try to figure out where things are going next.
This is foolish move number one, but really smart people have a tough time ignoring the media and the economy. Smart people can’t help it. They want to use their brainpower, and in the process, they lose, disastrously long term to the dumb money—the stock market indexes. Buying diversified indexes on the cheap is when, to steal Buffett’s phrase, “Dumb money ceases to be dumb”
If the stock market is trading at a reasonable multiple (today it trades at roughly 14X earnings, which puts it at roughly the 100 year average) then you’ll make long term money by buying at these levels.
Valueline has a great, long term DOW Jones Industrials price chart dating back to 1920. History spells out one consistent reality. Buy when PE ratios are at or below 14X earnings, and you’ll make long term money. Buy when PE ratios are silly (like 22 or above) and the decade that follows will give you investment misery. Where’s the PE today? Roughly 14X earnings.
It doesn’t matter how you slice the pie; that’s the historical reality.
But if you were a smart person living during times when the PE ratios were below 14X earnings, and if you watched, digested and analyzed economic news, you probably wouldn’t have bought anything. You would have sat waiting for better opportunities, for the economy to turn around, for unemployment declines to abate, for prices to get cheaper. Too bad. You wouldn’t have made as much money as you could have. Your brain power would have handicapped you.
Posted May 22, 2010 at 12:00 am
I recently had the pleasure of having dinner with an OEX trader, Floyd, from OEXOPTIONS. com, whose on-line advisory service has been rated in the top five by Stocks and Commodities Magazine for two years running. Floyd flew in from Florida to have dinner with my friend Johnny and his wife.
A trading friend and I were happy to tag along.
During our conversation Floyd mentioned to me that his most popular article is about his losing $250,000 in the stock market over a 6 month period. He certainly got my attention.
I suggest you read the article in its entirety for it may just offer some important clues about how to make $250,000 in the stock market.
What follows is an amended version.
Posted May 11, 2010 at 6:35 am
by Joshua M Brown:
I’m only 3/4′s of the way serious with that headline, but I’m about to make a pretty profound point so hold your comments until I get there…
Flip through this weekend’s issue of Barron’s and you’ll see headlines like these: Stocks At A 19 Month High and Investors Are Getting Giddy Again and The Old Normal and We’ve Filled The Lehman Gap, etc. All great reads, by the way, and all appropriately cautious and accurate.
But they miss the point.
The thing about selling stocks right now is, it forces you to do something else with your money. And that’s not necessarily a good thing these days.
Your options are as follows…