Thursday, April 2, 2015
ETFs let you avoid early trades
Anxiety Eh, Let me tell you a little story. I’ve done quite well in the last few years in the market but last year I noticed an anomaly. The accounts that I manage for my two Daughters had results that ran well ahead of my personal account results; it was a magnitude of plus 4 to 5 %.
My management training taught me that when you reflect on a problem it’s important to dig down deeply to determine the “root” cause; it’s the old “sit-in-a-dark-room” and thinks it through to a conclusion before you act. Without getting too deep into psychobabble I determined that my underperformance was due to me; I was the guilty party! Socrates said that people make themselves appear ridiculous when they are trying to know obscure things before they know themselves. Plato also alluded to the fact that understanding 'thyself,' would have a greater yielded factor of understanding the nature of a human being (it’s Human beings that think their stock-pickers BTW).
The cliff-note version of why I did better trading for my kids is that I worried about my holdings daily and I had structured those holdings to reflect my ego; I had a great many individual stocks. Looking a little deeper I saw that I was a pretty good stock picker. I had owned Netflix, Apple, Wells-Fargo, Facebook, Visa, MasterCard etc. at various times and traded in & out for small profits regularly. In KAS’s account things like a 50 share purchase of Visa eventually yielded a better that $7K profit. You get the picture; I was looking at my stuff way too often and trading way too much trying to react to every nuance that CNBC reported on.
It took me a while to work through it but here’s what I found. Individual stock holdings almost force you to review them very often so the daily-weekly market noise screams “do-something” to your detriment. I found that my Mutual Funds, being composed of a large basket of holdings made it impossible to react to day-to-day noise and I left them alone and they grew significantly in value over time. BTW, you’re young, always set your portfolio up to reinvest the dividend stream it furnishes you with automatic “Dollar-Cost-Averaging”.
As I looked more closely I couldn’t escape another troubling fact; Mutual Fund fees were expensive and it was a super rare manager that managed to beat his Funds comparable index. Whalla, the answer was inescapable, Buy that index. There are ETFs that sport an expense ratio low enough as to be a non-issue and while it’s less than 5% of Fund managers that can beat the S&P-500 benchmark almost all of the S&P ETF mirrors match it or beat it. It’s a simple premise that alluded me for a long time; an ETF holding somewhere between 35 and 500 equity holdings is not the kind if investment that you look at daily / hourly. If you eliminate the noise you’ll make more money with less anxiety and that’s all good.
In a nutshell that’s my version of why the “little-guy” usually has crappy returns. His single stock pick isn’t diversified and he’s scared to death that he’ll lose money on it so he frets, worries, trades trying to make his short-term bet a long term winner. Watching CNBC flacks can be detrimental to your portfolio returns!
So for the last 18 months I’ve been selling my mutual fund holdings on good market days and buying ETFs on market lows. I would estimate that I’m about half there to my goal. I got lucky since the market has essentially traded in about a 800 point range since the yearend; from a high of $18,000+ to a low of about $17,200.
A side benefit to all this is that it greatly simplifies my life because you just don’t worry and fret about a diversified basket of stocks like you would a single equity position. It also greatly aids my Estate Plan for now Wifey would inherit what I consider a balanced, diversified portfolio that would best be just left alone.
A related word on how the Experts predicted the 2007 market debacle. I’m ready to admit that I personally don’t really know when the market will swing or down. Okay, fine: I haven’t got an clue; there I’ve said it. Then again, neither does anyone else. I looked back at the financial media in the months before the market crash in 2007. The Lexis-Nexis database contains around 800 stock market stories for the three months immediately before the worst collapse in three-quarters of a century. By limiting the search to U.S. sources, I got it down to a nearly-manageable 400 or so which I proceeded to scan.
Here’s what I discovered: almost without exception, the public statements of major financial media outlets, mutual fund managers and hedge fund managers were stunningly clueless. Almost without exception, the story was that other than for one or two little puffy clouds in the distance, the skies were clear, you should have a song in your heart and a equity buy order in your hands.
Kiplinger’s led that parade in 2007 with “Why Stocks Will Keep Going Up” (July). BusinessWeek urged us, “Don’t Be Afraid of the Dark” (August 13). Money asked “Is This Bull Ready to Leave” (July) and concluded that the market was undervalued and that large cap growth stocks had “a strong outlook.” Fortune did some fortune-telling and found “A Sunny Second Half” (July 9); relying on “a hedge fund superstar,” they promised “This Bull Has Legs” (August 20). John Rogers of the Ariel Funds declared “Subprime Risks: Overblown … [it’s] time to buy” (September 17). Standard & Poor’s thought “equities could register nice gains by the end of the year” (September 20) as the result of a Fed-fueled breakout.
These are just a sample; remember the best-selling book, “Dow 20,000 this year”. In any event the market has rewarded the popular equity indexes with a very steady uptrend since 1900 even with the numerous short-term market breaks. Let us remember that the major market crash in 2008 was essentially erased in the next two years if you stayed in the market!
I think you can expect to make 12% on your investments over time based on the historical average annual return of the S&P 500. The S&P 500 gauges the performance of the stocks of the 500 largest, most stable companies in the Stock Exchange. It is often considered the most accurate measure of the stock market as a whole. The current average annual return from 1926, the year of the S&P’s inception, through 2011 is 11.69%. That’s a long look back, and most people aren’t interested in what happened in the market 80 years ago.
So let’s look at some numbers that are closer to today. From 1992–2011, the S&P’s average return is 9.07%. From 1987–2011, it’s 10.05%. In 2009, the market’s annual return was 23.46%. In 2010, it was 12.78%. In 2011, it was -1.12%. So yes the confluence of events triggered by the mortgage crisis in 2008 caused a market crash of 38.5% but look at 2009 and 2010 results. In those two years right after the famous 08 crash and you'll see that the market corrected by 23.46% in 09 and 12.78% in 2010. Morale of the story, stay invested; the trend is your friend.
Saturday, March 28, 2015
THINGS That Interested me this Week.
---China has 20% of the world’s population but only 7% of the world’s fresh water and 60% of that supply is contaminated to UN standards. The Great Lakes in the USA alone contain about 84 percent of North America's surface fresh water and about 21 percent of the world's total supply. About half of the global population could be facing water shortages by 2030 when demand would exceed water supply by 40 percent, says United Nations Secretary General Ban Ki-Moon.
---Ayn Rand famously said, "You can avoid reality, but you cannot avoid the consequences of avoiding reality."
---Paleontologists recognize a total of five documented extinctions whereby over ninety percent of all species disappeared.
---At the height of the Dot-com boom, just before the crash CISCO (CSCO) was trading at 61 times earnings. Today’s high flyer is APPLE (AAPL) and it trades at a modest 16.7% P/E and sports a dividend of 1.52%.
---Texas created 40% of all the jobs created in the USA since 2009 while maintaining the 7th lowest tax burden in the country.
As a stand alone country Texas would be the 14th largest economy in the World. It’s exports were more than New York State and California combined.
---China has 20% of the world’s population but only 7% of the world’s fresh water and 60% of that supply is contaminated to UN standards. The Great Lakes in the USA alone contain about 84 percent of North America's surface fresh water and about 21 percent of the world's total supply. About half of the global population could be facing water shortages by 2030 when demand would exceed water supply by 40 percent, says United Nations Secretary General Ban Ki-Moon.
---Ayn Rand famously said, "You can avoid reality, but you cannot avoid the consequences of avoiding reality."
---Paleontologists recognize a total of five documented extinctions whereby over ninety percent of all species disappeared.
---At the height of the Dot-com boom, just before the crash CISCO (CSCO) was trading at 61 times earnings. Today’s high flyer is APPLE (AAPL) and it trades at a modest 16.7% P/E and sports a dividend of 1.52%.
---Texas created 40% of all the jobs created in the USA since 2009 while maintaining the 7th lowest tax burden in the country.
As a stand alone country Texas would be the 14th largest economy in the World. It’s exports were more than New York State and California combined.
Monday, March 16, 2015
I know your eagerly awaiting an entry point for the market. My advice is to be patient, you'll get one. We came close with the very short lived 3.6% swoon in the last two weeks but waiting a bit will give you a great outcome.
Here's a little trivia to ponder about the length of historic, long lived BULL markets,
---December 1987 to March 2000; 4494 days
---June 1949 to August 1956; 2607 days
---October 1974 to November 1980; 2,248 days
---CURRENT BULL MARKET, 2, 210 days as of 3-16-2015
---July 2002 to October 2007; 1,904 days
We are ripe for a pullback and major equity purchases are problematic in MHO. That being said I do nibble a bit in my personal account on what I think might be special situations; I recently bought a round lot of VISA (V) because its balance sheet is sterling, It signed a contract with Cosco to replace Cosco's present card (American-Express) and it has announced a 4 for split effective on March 18th, 2015. The stock pays close to a 2% dividend and is 90% held by institutions I.E. mutual funds, ETFs and such.
I know that splits do not add value but the fact is that most stock splits increase the stocks NAV by 20% in the year after the split because when you lower the per share price from $200 plus to say $50 you bring in a bunch of retail investors who haven't the cash to buy at the higher price. I know it sounds hooky but it works, I've ridden this train before.
Take it slow and wait for the right opportunity.
Murray
Here's a little trivia to ponder about the length of historic, long lived BULL markets,
---December 1987 to March 2000; 4494 days
---June 1949 to August 1956; 2607 days
---October 1974 to November 1980; 2,248 days
---CURRENT BULL MARKET, 2, 210 days as of 3-16-2015
---July 2002 to October 2007; 1,904 days
We are ripe for a pullback and major equity purchases are problematic in MHO. That being said I do nibble a bit in my personal account on what I think might be special situations; I recently bought a round lot of VISA (V) because its balance sheet is sterling, It signed a contract with Cosco to replace Cosco's present card (American-Express) and it has announced a 4 for split effective on March 18th, 2015. The stock pays close to a 2% dividend and is 90% held by institutions I.E. mutual funds, ETFs and such.
I know that splits do not add value but the fact is that most stock splits increase the stocks NAV by 20% in the year after the split because when you lower the per share price from $200 plus to say $50 you bring in a bunch of retail investors who haven't the cash to buy at the higher price. I know it sounds hooky but it works, I've ridden this train before.
Take it slow and wait for the right opportunity.
Murray
Tuesday, February 24, 2015
Statistical Investment facts to ponder
There are many divergent facts that swirl around the investment world. Many of them are useful to spot trends while some are just smoke masking the reality. It is always useful to look at these stats / facts before forming your own decision. As Joe-Friday said, “just-the-facts,-only –the facts.”
----Only 54 percent of American adults own stock market investments in 2014 versus 67 percent in 2000 per a “Gallup” poll.
----401K participation of eligible adults is 80% but this stat masks the fact that many small company and minimum wage service employees simply aren’t eligible.
----The Society of Actuaries currently estimates that the average 65 year old man will live to 86.6 years, up from 84.6 years. The average woman will live to 88.8 years old, up from 86.4 years. Are you ready for more?
----The average US investor realized a 3.69% average, yearly gain for the last 30 years.
There are many divergent facts that swirl around the investment world. Many of them are useful to spot trends while some are just smoke masking the reality. It is always useful to look at these stats / facts before forming your own decision. As Joe-Friday said, “just-the-facts,-only –the facts.”
----Only 54 percent of American adults own stock market investments in 2014 versus 67 percent in 2000 per a “Gallup” poll.
----401K participation of eligible adults is 80% but this stat masks the fact that many small company and minimum wage service employees simply aren’t eligible.
----The Society of Actuaries currently estimates that the average 65 year old man will live to 86.6 years, up from 84.6 years. The average woman will live to 88.8 years old, up from 86.4 years. Are you ready for more?
----The average US investor realized a 3.69% average, yearly gain for the last 30 years.
Thursday, February 12, 2015
“We have gone too long without a 10 percent market correction.”
We’ve all heard these kinds of statements to justify doom & Gloom predictions for 2015. I think it’s all BS. This kind of background noise is always with us and is rarely correct. My fearless prediction for 2015 is that we will enjoy 8 percent return in the overall market for the year based on the S&P-500.
We actually had a 9.83% sell-off at the end of 2014. Note that there is indeed a difference between a pullback / correction and a crash. The generally-accepted ranges are: 5% = dip, 5-10% = pullback, 10-20% = correction and +0% = crash. There's more to it, but the guidelines are pretty universal. So, is it really reasonable to argue that a 9.83% sell-off (0.17% shy of 10%) doesn't qualify as a 10% correction? Yes, I'm aware that the 9.83% bottom was only intraday, but my point remains the same, in that perhaps the purpose of a correction was still served. An attorney might refer to this as a question of "the spirit of the law, versus the letter of the law."
Yes, our Bull-Market is middle aged but historically we’ve experienced many market runs that went beyond a single decade. The 1982-2000 Secular Bull Market (18 years)---The 1966-1982 Secular Bear Market (16 years) and the 1949-1966 Secular Bull Market (17 years). Our Price / Earnings ratio stands at just a wee-bit over the historic mean and the last batch of earnings reports had 71% of the company’s reporting meeting or beating their forecasts.
We’ve all heard these kinds of statements to justify doom & Gloom predictions for 2015. I think it’s all BS. This kind of background noise is always with us and is rarely correct. My fearless prediction for 2015 is that we will enjoy 8 percent return in the overall market for the year based on the S&P-500.
We actually had a 9.83% sell-off at the end of 2014. Note that there is indeed a difference between a pullback / correction and a crash. The generally-accepted ranges are: 5% = dip, 5-10% = pullback, 10-20% = correction and +0% = crash. There's more to it, but the guidelines are pretty universal. So, is it really reasonable to argue that a 9.83% sell-off (0.17% shy of 10%) doesn't qualify as a 10% correction? Yes, I'm aware that the 9.83% bottom was only intraday, but my point remains the same, in that perhaps the purpose of a correction was still served. An attorney might refer to this as a question of "the spirit of the law, versus the letter of the law."
Yes, our Bull-Market is middle aged but historically we’ve experienced many market runs that went beyond a single decade. The 1982-2000 Secular Bull Market (18 years)---The 1966-1982 Secular Bear Market (16 years) and the 1949-1966 Secular Bull Market (17 years). Our Price / Earnings ratio stands at just a wee-bit over the historic mean and the last batch of earnings reports had 71% of the company’s reporting meeting or beating their forecasts.
Friday, February 6, 2015
Advertising Words, Listen with great care.
As always, an investor must be ever alert when an investment is being presented to him. We’re all adults so we are aware of “weasel” words that are less than definitive like may, might, should, could etc. That’s all good but lately advertisers have become ever more creative.
Have you heard the ad selling silver that’s playing constantly on network TV? It says “buying silver is the smart move since right now you can buy silver for less than its all-in-cost of production.”
What they have found is a clever way to say is that Silver is cheap now because it has been a remarkably lousy investment. Let’s review why you can presently buy silver at less than production cost.
“SLV” is an ETF that mirrors the spot price of silver. It’s annualized return for 5-years is minus (1.9%) and it is down (19.5%) for the last year. Silver peaked at $48 an ounce in the first quarter of 2011 and its chart shows a steady downtrend to today’s price of $16 an ounce. “Selling below the price of production”, indeed. I suppose that buying Radio-shack today at $.09 a share as they enter bankruptcy could easily be reworded as an opportunity to buy-low to allow selling high!
As always, an investor must be ever alert when an investment is being presented to him. We’re all adults so we are aware of “weasel” words that are less than definitive like may, might, should, could etc. That’s all good but lately advertisers have become ever more creative.
Have you heard the ad selling silver that’s playing constantly on network TV? It says “buying silver is the smart move since right now you can buy silver for less than its all-in-cost of production.”
What they have found is a clever way to say is that Silver is cheap now because it has been a remarkably lousy investment. Let’s review why you can presently buy silver at less than production cost.
“SLV” is an ETF that mirrors the spot price of silver. It’s annualized return for 5-years is minus (1.9%) and it is down (19.5%) for the last year. Silver peaked at $48 an ounce in the first quarter of 2011 and its chart shows a steady downtrend to today’s price of $16 an ounce. “Selling below the price of production”, indeed. I suppose that buying Radio-shack today at $.09 a share as they enter bankruptcy could easily be reworded as an opportunity to buy-low to allow selling high!
Thursday, February 5, 2015
Whether “Retail” Investments ?
The Retail sector is in a state of flux that will last many years. We’ve recently experienced big investor problems with retail companies as diverse as Circuit City, Sears, Barnes & Noble, J.C. Penney and Radio shack. All retail is changing; Brick and Mortar stores are struggling to compete with internet sales.
Simply put, there are way too many stores and in general the large Malls are rapidly losing ground. Even the Internet sales giant Amazon can see a problem building with Alibaba. The little investor wanting to avoid excess risk in this sector might consider Home-Depot or Lowes but they hover close to their historic high prices. I think that our retail community of companies shrinks by half in the next decade. Of course some retail will prosper but picking the gold out of the dung will not be easy. If you don’t think that retail is changing ask the nearest 20 year old what percentage of their purchases are through the internet.
By the way, As I write this on August 5th 2015 Radio Shack went into bankruptcy. The CNBC coverage of this expected event stated that Radio Shack had 4063 stores and it was questionable if they would attempt to exit bankruptcy; wow, over 4K stores and they may just fold up as Circuit City did. The CNBC coverage then went on to say that Amazon was interested in buying the stores from Radio Shack.
You don’t have to be a Business Major to see where this might be going. Just picture an Amazon showroom for TVs or Refrigerators. The customer would pick out an appliance and pay Amazon. The Fridge would simply ship from the Whirlpool factory and Independent Contractors working for the Amazon store would install it. The item would be in Amazon’s inventory for at most a couple of days to delivery. Think about it, the largest expense of an Appliance store is inventory and Amazon has the money in hand before the goods hit their books as inventory. That would be pricing power.
Ok, so what are the general types of investments with less risk? I like companies that are able to plot their profits because they are part & parcel of modern life. The credit card titans like Visa, Mastercard and American express come to mind. They have pricing power and have kinda a troika of profit. Insurance companies and some banks also qualify due to our very cheap money supply.
I guess that established “service” companies that occupy the upper tier of their industry qualify. If your company has no inventory and essentially takes a commission on a sale then by definition it is a transfer agent incurring cost only when booking a sale. Disclaimer, I currently hold positions in Aflac, P&G, Altria, Merck, AT&T, Bank-America, Visa, Lowes, Pfizer, Brinker International, Wells-Fargo and Walgreens and am well into the money with them all.
The Retail sector is in a state of flux that will last many years. We’ve recently experienced big investor problems with retail companies as diverse as Circuit City, Sears, Barnes & Noble, J.C. Penney and Radio shack. All retail is changing; Brick and Mortar stores are struggling to compete with internet sales.
Simply put, there are way too many stores and in general the large Malls are rapidly losing ground. Even the Internet sales giant Amazon can see a problem building with Alibaba. The little investor wanting to avoid excess risk in this sector might consider Home-Depot or Lowes but they hover close to their historic high prices. I think that our retail community of companies shrinks by half in the next decade. Of course some retail will prosper but picking the gold out of the dung will not be easy. If you don’t think that retail is changing ask the nearest 20 year old what percentage of their purchases are through the internet.
By the way, As I write this on August 5th 2015 Radio Shack went into bankruptcy. The CNBC coverage of this expected event stated that Radio Shack had 4063 stores and it was questionable if they would attempt to exit bankruptcy; wow, over 4K stores and they may just fold up as Circuit City did. The CNBC coverage then went on to say that Amazon was interested in buying the stores from Radio Shack.
You don’t have to be a Business Major to see where this might be going. Just picture an Amazon showroom for TVs or Refrigerators. The customer would pick out an appliance and pay Amazon. The Fridge would simply ship from the Whirlpool factory and Independent Contractors working for the Amazon store would install it. The item would be in Amazon’s inventory for at most a couple of days to delivery. Think about it, the largest expense of an Appliance store is inventory and Amazon has the money in hand before the goods hit their books as inventory. That would be pricing power.
Ok, so what are the general types of investments with less risk? I like companies that are able to plot their profits because they are part & parcel of modern life. The credit card titans like Visa, Mastercard and American express come to mind. They have pricing power and have kinda a troika of profit. Insurance companies and some banks also qualify due to our very cheap money supply.
I guess that established “service” companies that occupy the upper tier of their industry qualify. If your company has no inventory and essentially takes a commission on a sale then by definition it is a transfer agent incurring cost only when booking a sale. Disclaimer, I currently hold positions in Aflac, P&G, Altria, Merck, AT&T, Bank-America, Visa, Lowes, Pfizer, Brinker International, Wells-Fargo and Walgreens and am well into the money with them all.
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