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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Posted February 14, 2012 at 3:40 am
by Ben Steverman
Only the gloomiest of Wall Street’s prognosticators got it right in 2008 and 2009. Since then, their pessimism has been infectious.
On almost any investing topic — from emerging markets to U.S. stocks, from commodities to sovereign debt — there are respected experts predicting the worst.
So far, apocalypse hasn’t arrived. The U.S. economy shows signs of life. Europe is muddling through its debt concerns. The economies of China and India have slowed but not stalled.
If these commentators, who range from short-seller Jim Chanos to GMO’s Jeremy Grantham, prove prescient — and Bloomberg.com will check in later this year to see if they are — the biggest surprise in 2012 would be some truly good news. [Continue to slideshow]…
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Editor’s Note: For the WV’s take on self-styled prophets-of-peril, read our posts about prognosticating, starting with:
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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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Posted February 9, 2012 at 3:55 am
by Daniel Kiernan
Wine investing is seen as a diversifying element in a portfolio, with returns that are relatively uncorrelated to traditional investment markets.
But with volatility at unprecedented levels in the past five years it is no surprise wine markets have felt some of the upheaval.
This was clearly demonstrated in the second half of 2011 when the Liv-ex 100 Fine Wine index, which represents the price movement of 100 of the most sought-after fine wines for which there is a strong secondary market, fell by 21.5 per cent.
To take advantage of the asset class there is the option of direct investing, including through a managed portfolio of a basket of wines, or through specialist investment funds.
Mr Smith says:
“It remains possible to invest in wine by owning cases directly, but this usually involves suffering the margins (on both the buy and sell sides) charged by merchants, and makes diversification – and hence risk management – more difficult.
“Instead, investors – whether they are connoisseurs or simply like the risk/return profile of wine – are increasingly looking at funds, which are more likely to be incentivised to buy and sell at the best possible prices.
“Funds can also pool money across investors to provide diversification, and use their professional expertise to select the wines with the best prospects of future growth. While there are fees involved with funds, these are transparent and can often work out less than the more hidden transaction costs associated with direct investment.”
Mr Brierley agrees investing through a fund offers [continue]…
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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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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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Posted February 8, 2012 at 2:55 am
by Lloyd Khaner
Welcome to my at-a-glance guide to the issues facing investors this week — a unique tool for traders and money managers.
Typically the term “wall of worry,” refers to the entire body of concerns influencing stock market action. When the wall is high, meaning the market is nervous, stocks tend to get cheaper.
This wall of worry is even more specific. Every week I list the exact concerns in the marketplace and use the list to help me make buying and selling decisions.
As I like to say, “Buy fear, sell cheer.” Scroll over each “worry” for additional comments.
Go to this week’s wall here…
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Posted February 6, 2012 at 3:50 am
by Joel Arbaje
They were doing just fine before, but Facebook’s biggest minority owners are about to be catapulted into a far more elite bracket.
As we ponder what they’ll do with with new millions (or billions in some cases), here’s a look at what got them where they are today.
For the colorful and creative David Choe, he was offered cash or stock options as a so-called “adviser” for payment in 2005, Choe chose stock–likely gaining between 0.1% and 0.25% of the company’s stock at that point. At IPO this could convert to a value of $200 million. [More on David here...]
We’re looking at an expected $5 billion IPO. So Parker’s 4% stake in a post-IPO company, freshly valued around $85 billion, will convert to $3.4 billion. [More on Sean here...]
Nearly half a billion dollars for Reid Hoffman. His $40,000 investment seems to have netted him a 0.5% stake. In a possible $85 billion company that would lead to $425 million in value. [More on Reid here...]
What Chris Hughes will do with his new millions? Hughes has a 1% stake, which translates into $850 million of worth in what could eventually be an $85 billion business. [More on Chris here...]
For Peter Thiel at 3% of a possible $85 billion company he’ll be worth $2.55 billion more. That’s a quadriggigillion times return on the investment. A googleplex times…a…well, let’s just say if you had $500,000 to spend, it probably wouldn’t earn you over $2 billion just seven years later. [More on Peter here...]
Early investor Jim Breyer has an assumed 1% stake at an $85 billion IPO would equate to $850 million. [More on Jim here...]
For cofounder Eduardo Saverin, his settlement with Facebook resulted in him keeping a 5% share, but he’s said to have sold it down to 2.5%. At an $85 billion company value, that equates to $2.1 billion. [More on Eduardo here...]
What Li Ka-shing will do with his extra millions? A 0.8% stake in a Facebook worth $85 billion at IPO would equate to $680 million for Ka-shing. [More on Li here...]
Jeff Rothschild is believed to have an 0.8% stake, which will be worth $680 million after the IPO. [More on Jeff here...]
Sheryl Sandberg has a 0.1% stake, at a post-IPO $85 billion company that’s worth $85 million. [More on Sheryl here...]
Dustin Moskovitz has a 5% stake in Facebook, which for an $85 billion company would equate to $4.25 billion. That’s around $157 million for every year of his life. [More on Dustin here...]
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Posted February 6, 2012 at 12:10 am
by Jonah Lehrer
It’s been a tough few years for Wall Street. Traders got big bonuses for taking foolish risks, while taxpayers got stuck with the bill. But without the financial industry’s machinations, Facebook couldn’t go public, your neighbor couldn’t get a mortgage and we’d all be stuck buying cars with cash.
This raises the obvious question: How can we ensure that Wall Street doesn’t get carried away as it did before the 2008 meltdown? That traders aren’t seduced by foolish risks in the near future?
One approach has been increased governmental regulation, such as the Dodd-Frank Act of 2010, which attempts to reign in the excesses of the financial industry with new rules and restrictions. Only time will tell if this strategy works.
A different approach to reducing the irrationality of Wall Street can be found in new research led by Steve Sapra and Paul Zak, neuroeconomists at Claremont Graduate University. Dr. Zak got the idea for the paper after spending time with [continue]…
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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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