Posted June 6, 2011 at 12:55 am
by Nanette Byrnes
Recently we wrote a post about Tactical Asset Allocation and how tough it can be to execute effectively. That in turn set off a discussion of the lack of meaning in terms like “buy-and-hold” and “tactical asset allocation.” I was accused of setting up a false dichotomy. There are stocks that you buy and hold. You do that because they continue to do well, argued Roger Lowenstein. But you do have to be willing to let go of the ones that aren’t working.
Lowenstein believes in stock-picking, but if you don’t think that you have that skill, or if you want to balance a few such picks with a broader diversified approach, then you may indeed be interested in the passive v. allocation debate.
In a recent post on his Wise Investing blog, Larry Swedroe sought to better explain just what passive investing in. It is not “by and hold.” Passive investing is passive, but not pulse-less.
Posted May 26, 2011 at 3:03 am
by Keith Fitz-Gerald, Chief Investment Strategist, Money Morning
I’ve lectured on investment strategies the world over, but I recently got one of the most intriguing questions I’ve been asked in a long time at the Global Currency Expo in San Diego, California.
An attendee asked me: “Is it possible to achieve decent performance if I don’t want to include stocks?”
In short, the answer is “yes” — though I wouldn’t recommend a “stockless” portfolio because of the tradeoffs involved.
Still, it is possible to achieve a “decent” performance without stocks.
Here’s how you’d do it.
A successful allocation model for a stockless portfolio would look something like this:
* You could argue that these are actually stock investments and I would take your point. But for purposes of our discussion and our objectives of achieving stock-like returns, I think we need to include preferred stocks because of the high, fixed dividend they kick off that makes them more bond-like.
We’ll take an in-depth look at the allocation model in a moment. But let’s examine the negative points of a stockless portfolio first.
There are negative aspects to owning a stockless portfolio.
To begin with, the U.S. Federal Reserve’s loose monetary policy right now is bullish for stocks, so by forgoing equities, you’d be missing out on some big potential gains. At the same time, you’d be exposing yourself to more volatility and greater risks. You’d also miss out on some hefty dividend payouts.
Posted May 24, 2011 at 12:50 am
An interview with Barry Ritholtz, CEO and Director of Equity Research, Fusion IQ
Ritholtz: We’re now about 86% long and have been for some time.
We have been finding names on a bottom up basis. I think many people had expectations that with the coming end of QE2 the world was coming to an end and that the market was coming to an end. We just don’t see that happening anytime soon. Right now, I think we’re at the phase of the market where a lot of people are specifically looking for a correction, and we just don’t see that as imminent. While there’s very likely a 25% correction, somewhere out in the future, we’re just not there.
Forbes: Well, that’s encouraging.
Ritholtz: None of the data that we analyze, none of the market internals, none of the technicals, nothing is suggesting that a correction is imminent. So that leaves us with our clock ticking. And from a bottom-up perspective, we’ve been finding a mix of small-cap and large-cap names. It’s a pretty interesting mix. I think last time we spoke, I mentioned Dell. We still own that.
Forbes: Is that still one you would recommend at this point?
Ritholtz: It hasn’t run away yet. It’s relatively cheap. It’s widely hated. We like that in a value stock.
We also own CBOE Stock Exchange. We owned that before the New York Stock Exchange takeover, so it’s had a nice run. I would tell anyone who wants to jump on to be aware that this is a name that’s had a nice run. So you have to be a little careful.
We also have a pretty broad based holding which is the Vanguard Total Stock Market Fund. That’s just a broad market holding. It trades a couple million shares a day, unlike the spiders which tend to be disproportionately impacted by a handful of stocks. When you look at the spiders, just the Nasdaq Qs, the top ten stocks move those funds disproportionately.
Vanguard Total Stock Market Fund is low cost ownership and is instant exposure to the long side of equities with very little – I would go so far as to say no – single stock risk. If you have the Nasdaq QQQ, Apple, Google tends to overwhelm everything else in there.
Posted May 23, 2011 at 1:35 am
by Karen Blumenthal
Women are a majority on college campuses and a growing force in the American workplace. But in survey after survey, they rate themselves as less confident—and less knowledgeable—about money and investing than men do.
This disconnect can carry a steep potential price. Since they are likely to earn less than men and live longer, women may have a greater need for their savings in their later years—but they would benefit from the kind of confidence that men have in their own investing prowess to get there.
One thing is in their favor: When they do invest, their humility and caution make them far less likely than men to trade excessively or to take outsize risks, which can benefit them in the long run.
Only 26% of women were confident making their own investment decisions, compared with 44% of men, according to a survey by MassMutual Financial Group of 1,500 participants in its retirement plans published in March. Both were less confident than a year ago.
Women also expressed much less investing confidence than men in recent surveys conducted by market-research firm Mintel Group and Brinker Capital, an investment-management firm that questioned more than 300 clients of 78 financial institutions.
Tellingly, the surveys find that neither men nor women feel overwhelmingly confident or knowledgeable about the broader investing process. “Both genders are in horrific need of basic help,” says Manisha Thakor, founder of the Women’s Financial Literacy Initiative.
In surveying 2,000 adults about investment accounts that they direct themselves, Mintel found that men were more likely to invest in stocks, exchange traded funds, futures and options, while women were more likely to invest in mutual funds.
Most investors in the survey don’t trade very much: More than half of men and more than three-quarters of women traded, at most, a few times a year. But a third of men said they traded at least several times a month, while only half as many women did.
There are other differences: Women are more likely to get their investment information from people, such as financial advisers or family, than from newspapers, books or websites, according to the surveys, and see themselves as risk averse. In the Brinker survey, 42% of men said they were “extremely” or “very” comfortable taking investment risks, twice the rate of women.
Posted May 20, 2011 at 3:30 am
From Dividend Growth Stocks
Every investor wants to earn more. It is how we define “more” and how we go about earning it that defines the type of investor we are. Income investors want more income. Yield is a significant determinate of income. There are two ways to own a high yield dividend portfolio.
If you want a high yield [dividend] portfolio today, the only way to get it is to buy high-yield [dividend] stocks. The problem with this approach is that companies with high-yield stocks are not run by nicer, more generous, shareholder-friendly executives. Instead, companies with high-yield stocks usually carry more risk.
This path to high-yield often ends with dividend cuts or significantly declining share prices. That leads us to option II, a better way to earn high yield for the more conservative income investor.
Instead of buying a current high-yield stock, investors in dividend growth stocks prefer to build their own. Granted, the current yield may never be classified as high-yield, but over time the yield-on-cost (YOC) can reach epic heights. YOC is simply Current Annual Dividend dividend by Original Cost Per Share.
YOC is not a substitute for calculating an internal rate of return (IRR). The IRR calculation takes into account both capital appreciation and the timing of cash flows (purchases, sells and dividends). YOC does illustrate the power of a growing dividend when compared to fixed rate investments suxh as bonds and CDs.
So how does YOC grow over time? Here are several real-world examples from my income portfolio:
To create a large gap between current yield and YOC all you need is a dividend growing faster than the stock price and some time to pass. This can be a very powerful combination if you are fortunate enough to purchase a low yielding stock before several significant dividend increases.
Consider Wal-Mart (WMT). In July 2007, I purchased WMT at $48.83/share at a time when its quarterly dividend was only $0.22/share. The initial yield was a lowly 1.8% ($0.22*4/48.83). Four dividend increases later, WMT is now paying a quarterly dividend of $0.37/share which gives me a respectable YOC of 3.0% ($0.37*4/48.83).
That is a 68% increase in the stock’s dividend, while its share price only grew 12.6% to around $55 for a current yield of 2.7%. If the two growth rate were to remain constant the difference between YOC and current yield will grow exponentially.
Posted May 16, 2011 at 5:42 pm
Why the man who runs the world’s largest mutual fund sold all his Treasury bonds
by Megan McArdle
In February 1993, as the fledgling Clinton administration grappled with the nation’s budget woes, campaign adviser James Carville groused to The Wall Street Journal: “I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everyone.”
If Carville were serving in the Obama administration today, he’d be seeking reincarnation as Bill Gross. The founder and co–chief investment officer of PIMCO, Gross runs his firm’s Total Return Fund—the world’s largest mutual fund, with holdings entirely in bonds. And for some time, he has been an outspoken critic of U.S. economic policy.
Gross demurred when I suggested that James Carville might want to be him. “I thought the remark was striking at the time,” he said, “but no, I didn’t feel that they were catering to us at every turn.”
But Democrats wrestling with the legacy of Ronald Reagan’s deficits resented the influence of what the analyst Ed Yardeni had dubbed “the bond vigilantes”: the investors who enforce fiscal and monetary discipline when governments won’t. If your political system inflates its currency, or fails to align its spending with its tax revenues, the bond vigilantes will raise your interest rates until you either get it together … or catapult into a crisis.
In the 1990s, we chose to get it together; thanks to tax hikes under both Bush I and Clinton, and a massive influx of capital-gains-tax revenue from the stock-market bubble, we even enjoyed a brief surplus. The bond vigilantes retreated over the horizon. But now deficits are back—and bigger than ever. In 2010, the United States spent $1.3 trillion more than it took in.
This year, the Congressional Budget Office expects us to borrow another $1.5 trillion. In just two years, we will have borrowed almost 20 percent of gross domestic product, or more than $9,000 for every person in the United States. But we won’t be borrowing it from Bill Gross.
For some time, he’d been selling his Treasury holdings, and by early March, he had reportedly dumped all of them. Then in mid-April, Gross upped the ante by placing bets against U.S. bonds in the market, a move that pushed the Total Return Fund’s holdings of U.S. debt to the equivalent of minus 3 percent.
If the bond vigilantes really are getting the gang back together, then the size of Gross’s funds—and his recent divestment—would seem to make him their leader. With economists and politicians warning about the dire consequences of out-of-control deficits, it seemed like a good time to sit down and ask Gross how dire the situation was. Is the United States really heading for an epic showdown with the debt markets? And if it comes, how badly will we be hurt?
A trim, gentle-seeming 67-year-old, Bill Gross doesn’t look much like a vigilante. He speaks so quietly that my voice recorder gave up and turned itself off. PIMCO’s Newport Beach, California, office has the understated elegance of one of those five-star western resorts where executives go to de-stress.
The tranquility extends even to the trading floor, where Gross still sits for most of the day. I spent the latter half of the 1990s installing networks on New York trading floors, and even the smallest of them operated at a low roar. But PIMCO’s 100-seat floor is so eerily silent that I half-expected to see the traders communicating in sign language.
Showdowns with PIMCO come, not with a bang, but with the almost imperceptible clicks of traders calmly keying in their sell orders.
I started by asking Gross the questions on the mind of every economic pundit in Washington these days: Why did he sell? Does he think the U.S. will default on its debt?
Gross shook his head (gently). “Actual default is unimaginable.” He must be pretty confident in that judgment, because he confirmed rumors that he’s made a sizable bet against a default. “We’ve taken probably $1 billion worth of U.S. credit-default swaps on the long side at a yield of 0.5 percent per year, which is more than the 0.25 percent being offered by the feds.” Effectively, Gross is selling insurance on U.S. bonds—and getting a better return than he would by buying those bonds.
Posted May 11, 2011 at 2:12 am
by Ben Baden
While it’s important to monitor the performance of broad-based indexes and the returns of your mutual funds, a number of other investment indicators can help you understand how the investment climate is changing. Investor sentiment surveys and records of fund flows from the previous week, for example, can help you make prudent decisions.
It’s important to track a variety of indicators, however. “Not one of them will give you a perfect answer or an obvious signal,” says Lipper Senior Analyst Jeff Tjornehoj. “You have to develop your own mosaic of market conditions that will help feel your way into a buying or selling position.” Here are six numbers every investor should follow:
Investor returns. Look beyond your mutual funds’ trailing one-, three-, five-, and 10-year returns. Morningstar calculates “investor returns,” which measure the average investor’s returns in a particular fund, versus its published returns. These returns reveal how much money investors actually make or lose in a fund based on when they buy and sell.
“Generally, people tend not to time their decisions very well,” says Russel Kinnel, Morningstar’s director of mutual fund research. For instance, in 2010, the average domestic fund returned 18.7 percent, compared with 16.7 percent for the average fund investor. Investors fare much better when they invest in “boring, steadier funds” like balanced funds, which include a mix of stocks and bonds, Kinnel says. More volatile funds generally have lower investor returns because investors make emotional decisions to buy or sell at the wrong times.
Fund flows. By tracking fund flows each week, investors can determine which asset classes are seeing the most inflows, and possibly overheating, as well as those that are the most unloved, and potentially poised for a turnaround.
“[Fund flows] are a contrarian indicator more than anything else,” Kinnel says. At times, it can be a bad sign if a certain asset class experiences huge inflows, and a positive sign for funds that are being ignored. Each year, Morningstar compiles fund flows to pinpoint the three least popular stock fund categories, and advises investors to consider allocating a greater amount of their portfolio to the “unloved” funds of the year.
Posted May 2, 2011 at 1:33 am
By Jeff Clark, BIG GOLD
You’ve probably heard the term “smart money” used by various pundits, a reference to those investors and institutions that are consistently better at making money than the uninformed masses. Which begs the question: are you one of them?
To answer that query, let’s first describe smart money (not to be confused with the magazine by that name) so we have an idea of what makes this group of investors successful…
Smart money buys when others are fearful. A good example of this is last year’s Gulf oil disaster. Wild speculation of British Petroleum’s ultimate demise caused panicked bouts of selling. The stock lost roughly half its value in less than two months. To use a classic idiom, there was blood in the streets – and that, of course, was the time to buy. The investor who did so is currently up 50%, and that’s not even measuring from the stock’s absolute bottom.
Smart money sells when others are greedy. My colleague Doug Hornig is a perfect example of selling when others are greedy. In the Nasdaq hysteria of the late 1990s, Doug had accumulated a number of Internet stocks and watched his brokerage account swell to a level he’d never seen before. The greed around him was palpable; everyone was talking about the latest stock pick, the classic sign of a mania in full bloom. “But I’d had enough,” he told me. “My positions had logged spectacular gains, and bottom line, I knew this couldn’t go on forever.” He sold his Internet stocks prior to the 2000 top, just as the greed reached a pinnacle.
Smart money sees trends others don’t. Doug Casey urged readers in 1999 to buy gold, convinced from his own research and study that a bull market was about to get underway. But he couldn’t get an audience; no one wanted to talk about the metal or mining stocks. It goes without saying that he and many of his readers have since profited enormously, with many stocks earning doubles on top of doubles.
Smart money ignores the headlines. Beyond the traditional advice of “Buy the rumor/sell the fact,” smart money largely ignores the blather from mainstream media and instead focuses on the factors that ultimately drive headlines. When it reaches mainstream coverage, the smart money is already invested. And is looking at what will be tomorrow’s headlines.
Smart money plays the big trend, not the gyrations. What do Jim Rogers, Marc Faber, Rick Rule, Doug Casey, and Warren Buffett have in common? None of them “traded” their way to riches. They identified the fundamental factors driving the trend, bought big, and held on. No technical analysis, no trend lines on a chart, no fancy signals from moving averages. And they didn’t get scared out at the first drop in price.
Posted May 2, 2011 at 1:25 am
Forbes: Ken, good to have you back.
Fisher: Thanks for having me.
Forbes: Well, one always wants somebody who does so well on the market. For example, just to set you up as a great guru, last year the S&P went up 12.8%. The stocks you recommended in your column in Forbes, which you can get at a very good price, went up 18%, and that was after a generous cut for commissions.
Fisher: Well, I appreciate that. I’ve been very lucky over the years in my Forbes columns. I have always been amazed by what good luck I’ve had, and I always think that the next year is going to be a disaster. And so far, I’ve had some years where I didn’t do as well as I should’ve. But I haven’t had disaster picks. I mean, I’ve had some individual ones that have been disasters, of course. But I’ve been very lucky in Forbes over the years. Forbes has been very good to me, too.
Forbes: Well, since you’ve been doing this, in only three years have you underperformed the S&P.
Fisher: Since the accounting began 15 years ago, that’s true. And then, not by a lot. But again, better to be lucky than smart. When I first started writing my column at Forbes — now almost 27 years ago — I never, ever would’ve envisioned that that now, 27 years later, I’d still be writing a column for Forbes. That would’ve been inconceivable to me.
Forbes: Well, you’re also still writing books. So, it may be luck, but you’ve learned how to put the luck into book form. This new one, Debunkery. A lot of clichés out there. You were fond of saying, “That the market is the great humiliator.”
Fisher: I am.
Forbes: And you’re also fond of saying, “Half the success of investing is seeing reality, and the other half is seeing it before others see the reality.” Explain.
Fisher: Well, one of my points is that we operate as people, regularly, not so much as individuals, but as a society, as if we were sort of a community of chimpanzees chittering at each other, and this community doesn’t really have much memory.
Forbes: Investor as ape.
Fisher: Exactly. And we ape each other quite a lot. And in the process of this, one of my views has been that we regularly have things that reoccur over and over again, but we tend to either be blind to them, or we forget them.
And that process, then, causes us to get very excited about things which you can tell, simply by looking at history, aren’t worthy of getting excited over. But we do it over and over again. And some of these are semi-predictable, and the market — which I, as you said, refer to as the great humiliator — exists in my mind (and I don’t mean this literally and seriously) as a sort of a near-living spiritual, almost all-powerful entity that exists for one purpose and one purpose only.
Which is to humiliate as many people as possible, for as many dollars as possible, for as long a time period as possible. And the great humiliator is really good at humiliating, and our job is to engage the great humiliator without ending up too humiliated by it. It wants to get your readers. It would prefer to get me, because I’m more visible than the average reader that you have. It would love to get you, but it would also love to get someone’s aged, demented aunt, because it wants them all.
And to actually engage the great humiliator without ending up too humiliated, we need to have every trick in our arsenal to avoid making critical mistakes. Understanding what are the mythologies that you can prove are false, and also understanding history well enough — which I know you’re a big history buff. That this happened, and this happened, and this happened and nothing bad happened.
We’re seeing that again now, so don’t be too afraid. But everybody is afraid. Every time I ever see fear of a false factor, I know that’s bullish. And so, the part about figuring out reality, and then what people will think about reality before they think it — some of these things are pretty seriously sort of cyclical, and after these kind of things, those things follow.
But people’s memories on these are so shallow that they don’t anticipate that. So, for example, the first third of a bull market is typically led by the stocks that got decimated the most in the back half of the bear market. The back, roughly two-thirds in time, of a bull market, is typically led by stocks that are perceived of as markedly higher quality than they were perceived of at the beginning of that two-thirds of the bull market.
The latter part of bull markets are typically led by stocks that are seen then as high quality, but the ones that do best are the ones that weren’t seen as such high quality before. So, knowing that, you learn as you move through time to position yourself from these kinds of stocks into those kinds of stocks. If you believe, as I do, that we’re kind of in a year, this year, that’s sort of like a pause before the next and last leg of the bull market that might be a couple more years, you want to move yourself into companies that you think can take on a luster of higher image.
Forbes: You have obviously studied markets and their ups and downs, peculiarities and cycles. And, as you note, a bull market doesn’t mean everything goes up. It has its own particularities.
Forbes: Another thing you look at, referring to the amnesia, is that — in terms of sentiment — that if everybody thinks something is so, it means it’s already reflected in the market. If everyone thinks the world is coming to an end, maybe it is, but it’s probably reflected in the market.
Forbes: A year ago you told me you were bullish, and by golly the markets went up, even though people were highly cautious. Explain today. You said, “Too many people are bulls, too many people are bears, so you’ve got to be very careful. You’ve got to pick very selectively.”
Fisher: One of the things that I started doing a long time ago — and I wrote about in my 2006 book, The Only Three Questions That Count, but I started writing about this in Forbes a very long time ago — is looking at….
Posted April 28, 2011 at 3:17 am
by Upside Trader
The title of this post is pathetic I know. I have never done a “how to” post in my life. People that do write how to stuff, usually know nothing about anything, they rehash buzzwords and buzz phrases ad nauseum. They probably did poorly in school or didn’t go at all ( which in the new era ain’t a bad idea anyway).
Wharton students are bankrupt before they say “I do” to an employer who isn’t hiring anyway. But Wharton dads have money, so probably not an issue.
But how do you really make money consistently in the market without massive frustration or quitting the game entirely? People do it, I do it. Not many do it, about eighty to ninety percent of traders lose money.
If I have bummed you out, or you have read this type of piece before ( most likely penned by a complete schmuck who never traded) then leave now.
Every “win” I have had is cloaked in a loss. I love winners, but obsess over the losers, I tend to learn from the mistakes. I fool around on Stocktwits all the time, my tweets need subtitles unless you know my humor.
But when it comes to making money in the market I will tear your esophagus out before I let you get in front of me on a trade. I am confident to the point that I feel like the all powerful OZ when I start my day trading.
Am I cocky? Fuck yes and Fuck no.
I ran money for people from Tangiers to Berlin to Saudi Arabia and all points in between when I ran my hedge fund. I started the fund with fifty cents and grew it to five hundred million bucks. My performance was off the hook. I know stocks. My investors got statements every month, they never busted my balls. When a punk from Wharton at a “fund of funds” (slowly going out of business) who wanted to give me money, who had a daddy that knew somebody started condescending, I politely asked him to leave.
I didn’t need or want his money. I didn’t need him to “suggest” changes to my style. Correction..I wanted the money just not his attitude. Bad business I guess, but I detest condescension from a silver spoon. I had just had my office explode on the 78th floor of the World trade Center a month before and I felt happy and safe in my Jersey City headquarters, so he could go play lacrosse.
They were fails and they are the the guys on twitter who’s bio says: “I’m an entrepreneur looking to change the world”. Ummm….sure you are.
So what do you do?