Investment Philosophy:
An investor should view the world through an investment prism. Famously, the ridiculously successful manager of Fidelity’s Magellan fund back in the day made many big-bet investments based on his or his wife’s market observations. To that end be always curious about companies and products. Of course you'll need to form your own sort of investment philosophy. My own is “It’s better to make more money than to spend less.” What that means is that by concentrating on improving your personal “rate of return” you'll enjoy a much better life than if you set out to cut your spending. It’s simplistic but concise. If it doesn’t work for you formulate your own and make it part of your decision tree. As that famous “Financial Philosopher” Sponge-Bob stated so well, “no-money-is-no-good.”
Friday, November 28, 2014
Sunday, November 23, 2014
Buy and Hold Equity investing.
I am an active investor who enjoys spending untold hours researching investment possibilities but I realize that many (probably most) people don’t have an interest in the “market” strong enough to overcome their fear of investing. They limit themselves to CDs and other fixed income investments that return about a third of the inflation rate. The result is a return that actually diminishes their savings. I think there's a better way.
There used to be quite a few investors that bought into a stock position and never looked back. Back then they usually bought single companies that were stalwarts of stability; these kinds of companies were even called “widow & Orphan” stocks. That all changed in the last three decades when company’s like Kodak, Xerox and GM faltered and volatility reigned. I think that class of investor just left the Stock Market and hid under the bed.
Today there are equities that can furnish the “not-really-interested” investor with a reasonable return, diversification and the stability that’s only possible with well established companies that hold a dominant niche in their industry. These equities are ETFs and here’s my thoughts on a small investors portfolio that would only require a sporadic review.
My perfect put it in a drawer ETF portfolio:
SDY—S&P Dividend ETF—Pays Dividend of 2.19% and returned a 15% annual performance for 5 years. Top Ten holdings are 19.09% of the total holdings of 96 companies; TOP TEN are HCP-T-ED-NNN-TGT-PBCT-MCD-CVX-ABBV-LEG
VIG---Dividend Appreciation ETF—Pays 1.93% Dividend and returned 14.1% annual performance for 5 Years, The Top ten holdings are 36% of the total holdings of 166 companies, The TOP TEN are JNJ, PEP, KO, WMT ,QCOM,XOM,IBM,MMM,CVS,UTX
NOBL—Dividend Aristocrat ETF---Pays 1.44% Dividend and began in 2013, has returned 17% annualized. The Top ten holdings are 20.62% of the total holdings of 55 Companies , The TOP TEN holdings are SIAL,FDO,CTAS,LOW,NUE,SHW,ADM,VFC,CAH,HRL Note, The NOBL ETF is composed of equities that have increased their Dividend each year for 25 Yrs.
I have significant positions in all three of these ETFs and continue to add to them on any downturn but my advice for the new investor is too wait for a market break of more than 4%; be patient it will come; we had a 7% downturn in late September. As of today’s post buying 100 shares each of all three ETFs would cost $21,300 with all fees paid.
All three of these ETFs are new enough that while the double digit return for 5 years is impressive how about the stock market debacle in 2008 you ask? There is another ETF that’s mirrors the entire 500 stocks in the S&P-500; it trades under the symbol SPY. It has returned 19.5% for one year, 15.6% for 5 years, 8% for 10 years and 9.2% since it began trading in 1993. These are annualized figures that show returns every year.
If you're only a slightly more adventurous investor the following ETFs are very close to my perfect three “buy & hold” diversified ETF portfolio.
VHT—Vanguard Health Care ETF—Pays 1.1% Dividend and returned 20.1% annual performance for 5 yr--- The Top ten holdings are 45.8% of the total holdings of 310 companies, The TOP TEN holdings are JNJ,PFE,GILD,MRK,AMGN,ABBV,VNH,CELG,BIB
SPLV—S&P Low-Volatility ETF---Pays 2.26% Dividend and returned 14.9% YTD (began in 2011). Top ten holdings are 12.2% of total holdings, SIAL,WMT,CB,TRV,UPS,PG,CLX,ADP,BRK/B
You get the idea; I think if you're looking for a low-cost, leave it alone portfolio that offers stability with relatively low volatility then holding large positions in SDY, VIG and NOBL is a decent scheme. They won’t be rockets to the moon but they do offer good returns, diversification and sleep well at night stability.
I am an active investor who enjoys spending untold hours researching investment possibilities but I realize that many (probably most) people don’t have an interest in the “market” strong enough to overcome their fear of investing. They limit themselves to CDs and other fixed income investments that return about a third of the inflation rate. The result is a return that actually diminishes their savings. I think there's a better way.
There used to be quite a few investors that bought into a stock position and never looked back. Back then they usually bought single companies that were stalwarts of stability; these kinds of companies were even called “widow & Orphan” stocks. That all changed in the last three decades when company’s like Kodak, Xerox and GM faltered and volatility reigned. I think that class of investor just left the Stock Market and hid under the bed.
Today there are equities that can furnish the “not-really-interested” investor with a reasonable return, diversification and the stability that’s only possible with well established companies that hold a dominant niche in their industry. These equities are ETFs and here’s my thoughts on a small investors portfolio that would only require a sporadic review.
My perfect put it in a drawer ETF portfolio:
SDY—S&P Dividend ETF—Pays Dividend of 2.19% and returned a 15% annual performance for 5 years. Top Ten holdings are 19.09% of the total holdings of 96 companies; TOP TEN are HCP-T-ED-NNN-TGT-PBCT-MCD-CVX-ABBV-LEG
VIG---Dividend Appreciation ETF—Pays 1.93% Dividend and returned 14.1% annual performance for 5 Years, The Top ten holdings are 36% of the total holdings of 166 companies, The TOP TEN are JNJ, PEP, KO, WMT ,QCOM,XOM,IBM,MMM,CVS,UTX
NOBL—Dividend Aristocrat ETF---Pays 1.44% Dividend and began in 2013, has returned 17% annualized. The Top ten holdings are 20.62% of the total holdings of 55 Companies , The TOP TEN holdings are SIAL,FDO,CTAS,LOW,NUE,SHW,ADM,VFC,CAH,HRL Note, The NOBL ETF is composed of equities that have increased their Dividend each year for 25 Yrs.
I have significant positions in all three of these ETFs and continue to add to them on any downturn but my advice for the new investor is too wait for a market break of more than 4%; be patient it will come; we had a 7% downturn in late September. As of today’s post buying 100 shares each of all three ETFs would cost $21,300 with all fees paid.
All three of these ETFs are new enough that while the double digit return for 5 years is impressive how about the stock market debacle in 2008 you ask? There is another ETF that’s mirrors the entire 500 stocks in the S&P-500; it trades under the symbol SPY. It has returned 19.5% for one year, 15.6% for 5 years, 8% for 10 years and 9.2% since it began trading in 1993. These are annualized figures that show returns every year.
If you're only a slightly more adventurous investor the following ETFs are very close to my perfect three “buy & hold” diversified ETF portfolio.
VHT—Vanguard Health Care ETF—Pays 1.1% Dividend and returned 20.1% annual performance for 5 yr--- The Top ten holdings are 45.8% of the total holdings of 310 companies, The TOP TEN holdings are JNJ,PFE,GILD,MRK,AMGN,ABBV,VNH,CELG,BIB
SPLV—S&P Low-Volatility ETF---Pays 2.26% Dividend and returned 14.9% YTD (began in 2011). Top ten holdings are 12.2% of total holdings, SIAL,WMT,CB,TRV,UPS,PG,CLX,ADP,BRK/B
You get the idea; I think if you're looking for a low-cost, leave it alone portfolio that offers stability with relatively low volatility then holding large positions in SDY, VIG and NOBL is a decent scheme. They won’t be rockets to the moon but they do offer good returns, diversification and sleep well at night stability.
Friday, November 21, 2014
Getting Started in Investing
It seems so very simple, pick a stock, buy some shares and watch your money grow. At the end of the day retire with money. This is a great over-simplification just like the usual bromides about “buy-low & sell-high” or my favorite, “the way to improve your Golf game is to hit the ball less.” The reality is that to be a “successful” investor you’ll need to be well read and disciplined.
As in many things in life it’s never as easy as it looks. The very bare minimum steps to investing success for the little guy are:
1. Start early, Money doubles in about 10 years at 7 percent return compounded. It then stands to reason that you want as many 10 year periods as possible before retirement or whatever you need the money for. BTW, Google “The rule of 72” for a little math fun or go to http://www.investopedia.com/ask/answers/04/040104.asp . Keep in mind that for well over the last 100 years the stock markets trend line is up; don’t sweat the blips look at the trend.
2. Fully fund any sheltered accounts that are available to you. A work-based 401K that allows you to deduct the money you invest in it from your tax due is the best deal you will ever get since that free bike your dad bought you. Do the math, if you put $3000 in your 401K and your tax rate is 15% then the reality is that you bought a $3,000 for $2,550 or to put it a different way you made 15% return on your investment before the investment grew at all. Of course every year after you put money into the 401K that investment grows and compounds tax free. It’s a wonderful thing. BTW, many states like NY allow you to withdraw retirement funds tax-free; in NY they allow $20K a year per-person to be taken out w/o taxes being due. It is the best deal you'll ever get!
3. Fund your investments by setting up a savings program that takes a percentage of your wages every month before you see the money. You will soon get used to it and it will add up while allowing you to “income-average” into the Stock Market.
4. Preserve your principle; Investment monies are usually the very small sums left over from wages after you’ve paid all the family bills. Any loss of these “leftover” funds will dramatically lower a person’s investment returns. Let’s be careful out there.
5. Spread out your risk, for the small investor buying a single equity forms a heightened risk much like a single bet on the roulette wheel. A basket of equities in a mutual fund or ETF spreads out the risk over many holdings.
6. Anytime you buy an ETF or equity someone else is selling it for stock trades are done in a auction market; it’s always an open question as to if you have the ability and time to “pick” your own investments. There is no shame in buying into an index or mutual fund. In point of fact most mutual fund managers do not beat indexes like the S&P-500 over time.
7. Create a Quarterly Report; it’s all important to be aware of your progress and like any business a quarterly statement forces a close look at what you own and where you're going. The involvement of your spouse is all-important.
8. Plan to achieve “Critical Mass”; that’s the place in life where your investment return matches the funds you need to fund your life-style.
9. Look very carefully, at investments in established companies that have a history of dividend payout and growth. When equity has a 3 or so percent payout it’s a sign of good management and stability. It’s very difficult to make a case where buying a dividend stock ETF like VYM or NOBL would be a mistake. Year-in and year out these typically very large companies perform well with quite a bit less volatility. The other factor in favor of dividend payers is that they are mostly multinational companies that add exposure to worldwide markets.
10. Read everything, Conflicting opinions make you stride through your decision process.
It seems so very simple, pick a stock, buy some shares and watch your money grow. At the end of the day retire with money. This is a great over-simplification just like the usual bromides about “buy-low & sell-high” or my favorite, “the way to improve your Golf game is to hit the ball less.” The reality is that to be a “successful” investor you’ll need to be well read and disciplined.
As in many things in life it’s never as easy as it looks. The very bare minimum steps to investing success for the little guy are:
1. Start early, Money doubles in about 10 years at 7 percent return compounded. It then stands to reason that you want as many 10 year periods as possible before retirement or whatever you need the money for. BTW, Google “The rule of 72” for a little math fun or go to http://www.investopedia.com/ask/answers/04/040104.asp . Keep in mind that for well over the last 100 years the stock markets trend line is up; don’t sweat the blips look at the trend.
2. Fully fund any sheltered accounts that are available to you. A work-based 401K that allows you to deduct the money you invest in it from your tax due is the best deal you will ever get since that free bike your dad bought you. Do the math, if you put $3000 in your 401K and your tax rate is 15% then the reality is that you bought a $3,000 for $2,550 or to put it a different way you made 15% return on your investment before the investment grew at all. Of course every year after you put money into the 401K that investment grows and compounds tax free. It’s a wonderful thing. BTW, many states like NY allow you to withdraw retirement funds tax-free; in NY they allow $20K a year per-person to be taken out w/o taxes being due. It is the best deal you'll ever get!
3. Fund your investments by setting up a savings program that takes a percentage of your wages every month before you see the money. You will soon get used to it and it will add up while allowing you to “income-average” into the Stock Market.
4. Preserve your principle; Investment monies are usually the very small sums left over from wages after you’ve paid all the family bills. Any loss of these “leftover” funds will dramatically lower a person’s investment returns. Let’s be careful out there.
5. Spread out your risk, for the small investor buying a single equity forms a heightened risk much like a single bet on the roulette wheel. A basket of equities in a mutual fund or ETF spreads out the risk over many holdings.
6. Anytime you buy an ETF or equity someone else is selling it for stock trades are done in a auction market; it’s always an open question as to if you have the ability and time to “pick” your own investments. There is no shame in buying into an index or mutual fund. In point of fact most mutual fund managers do not beat indexes like the S&P-500 over time.
7. Create a Quarterly Report; it’s all important to be aware of your progress and like any business a quarterly statement forces a close look at what you own and where you're going. The involvement of your spouse is all-important.
8. Plan to achieve “Critical Mass”; that’s the place in life where your investment return matches the funds you need to fund your life-style.
9. Look very carefully, at investments in established companies that have a history of dividend payout and growth. When equity has a 3 or so percent payout it’s a sign of good management and stability. It’s very difficult to make a case where buying a dividend stock ETF like VYM or NOBL would be a mistake. Year-in and year out these typically very large companies perform well with quite a bit less volatility. The other factor in favor of dividend payers is that they are mostly multinational companies that add exposure to worldwide markets.
10. Read everything, Conflicting opinions make you stride through your decision process.
Tuesday, November 18, 2014
Fidelity LOW PRICE stock FLPSX
The “headline-news” on CNBC this morning (Nov, 18) was that Carl Icahn had said, “the stock market will probably correct in the next 2 to 5 years.” That’s one hell of a prediction eh? It only shows that CNBC is much more talk than edification and that at the end of the day, no one knows!
As the Stock Market seems to make new highs every day are there any opportunities to jump in? My Thoughts.
The Market is on a tear, on that we can agree. As I write this the Dow stands at $17,700 and the small investor fears buying in at a market top but know that as the market claws its way upward they are missing out on the “opportunity cost of Money” for sitting in cash doesn’t even come close to matching the inflation rate.
The market often favors certain sectors at certain times. At this point in time it seems that the Health-care and Tech sectors are the flavor of the month. I believe that buying into them is too risky although I admire my gains since I bought into them quite a while ago.
Looking at the “out-of-favor” sectors I like the lower price companies sector and I have bought into a Fidelity Fund (Low Price Stock, FLPSX) here is my reasoning.
---The overall market is up but at $49.94 a share FLPSX is squarely in the middle of its 52 week high-low range of $46 to $53. Remember it’s temporarily out of favor as is the Russell 2000 index as a whole
---It has the best fund manager in the industry in my opinion, Mr. Joel Tillinghast who started this fund way back in 1989 and year-in, year-out has steered it upward. His charter is stocks (worldwide) that sell at $35 a share or less and over 25 years he has proven that he is a great stock-picker and the man lives through his fund. It’s hard to find competence and continuity in the fund industry.
---When you average performance for the 25 years since its 1989 inception FLPSX has returned a 14.43% yearly, average return; that is 14.43% each year average even with the 2008 debacle in the results.
---His recent performance of 1 year @$11.46 in an out of favor sector is well above his peers.
---Company's like Microsoft in Tech and Pfizer in Health care are part of its portfolio, not small but bought under the $35 threshold.
---As with any fund or ETF you’re spreading your risk by buying into a group of equities. A single stock buy is a single bet and if that single bet falls you're at 100% risk. For the little guy a market basket of equities is preferable.
---Morningstar rates FLPSX at 4-stars and the fund returns a dividend of .97%.
I think this is a very good horse to ride into 2015 and I’ve purchased it on my own account and intend to add to my position on any weakness. My advice is to dip your toe into the water with the minimum position of $2500 on any day that the market isn’t up then add to it on weakness. I believe you will be rewarded in the coming year.
The “headline-news” on CNBC this morning (Nov, 18) was that Carl Icahn had said, “the stock market will probably correct in the next 2 to 5 years.” That’s one hell of a prediction eh? It only shows that CNBC is much more talk than edification and that at the end of the day, no one knows!
As the Stock Market seems to make new highs every day are there any opportunities to jump in? My Thoughts.
The Market is on a tear, on that we can agree. As I write this the Dow stands at $17,700 and the small investor fears buying in at a market top but know that as the market claws its way upward they are missing out on the “opportunity cost of Money” for sitting in cash doesn’t even come close to matching the inflation rate.
The market often favors certain sectors at certain times. At this point in time it seems that the Health-care and Tech sectors are the flavor of the month. I believe that buying into them is too risky although I admire my gains since I bought into them quite a while ago.
Looking at the “out-of-favor” sectors I like the lower price companies sector and I have bought into a Fidelity Fund (Low Price Stock, FLPSX) here is my reasoning.
---The overall market is up but at $49.94 a share FLPSX is squarely in the middle of its 52 week high-low range of $46 to $53. Remember it’s temporarily out of favor as is the Russell 2000 index as a whole
---It has the best fund manager in the industry in my opinion, Mr. Joel Tillinghast who started this fund way back in 1989 and year-in, year-out has steered it upward. His charter is stocks (worldwide) that sell at $35 a share or less and over 25 years he has proven that he is a great stock-picker and the man lives through his fund. It’s hard to find competence and continuity in the fund industry.
---When you average performance for the 25 years since its 1989 inception FLPSX has returned a 14.43% yearly, average return; that is 14.43% each year average even with the 2008 debacle in the results.
---His recent performance of 1 year @$11.46 in an out of favor sector is well above his peers.
---Company's like Microsoft in Tech and Pfizer in Health care are part of its portfolio, not small but bought under the $35 threshold.
---As with any fund or ETF you’re spreading your risk by buying into a group of equities. A single stock buy is a single bet and if that single bet falls you're at 100% risk. For the little guy a market basket of equities is preferable.
---Morningstar rates FLPSX at 4-stars and the fund returns a dividend of .97%.
I think this is a very good horse to ride into 2015 and I’ve purchased it on my own account and intend to add to my position on any weakness. My advice is to dip your toe into the water with the minimum position of $2500 on any day that the market isn’t up then add to it on weakness. I believe you will be rewarded in the coming year.
Thursday, November 13, 2014
BUREAUCRATIC RISK
The following is from the book “The Rational Optimist” by Matt Ridley
“Economists are quick to speak of “market failures” and rightly so, but a greater threat comes from “Government Failure”. Because it is a monopoly, Government brings inefficiency and stagnation to everything it runs; Government agencies pursue the inflation of their budgets rather than the service of their customers; pressure groups form an unholy alliance with Government agencies to extract ever more money from taxpayers for their members.”
“It’s a mystery why otherwise clever people still call for the Government to run more things and assume that if it did so it would somehow be more perfect, more selfless, next time. ”
To all this I would add that a bureaucratic enterprise working with the usual outdated regulations is an impediment to business at every level; one need only to think back to his or her experiences with their local DMV or the new health care website. As an investor be wary of industries that may be hobbled by Government regulation; there will be no innovation. The tendency of congress for the last few years is too pass very broad legislation then let the bureaucrats define it. When you think about this and realize that most career bureaucrats are now unionized you should be afraid, be very afraid.
The following is from the book “The Rational Optimist” by Matt Ridley
“Economists are quick to speak of “market failures” and rightly so, but a greater threat comes from “Government Failure”. Because it is a monopoly, Government brings inefficiency and stagnation to everything it runs; Government agencies pursue the inflation of their budgets rather than the service of their customers; pressure groups form an unholy alliance with Government agencies to extract ever more money from taxpayers for their members.”
“It’s a mystery why otherwise clever people still call for the Government to run more things and assume that if it did so it would somehow be more perfect, more selfless, next time. ”
To all this I would add that a bureaucratic enterprise working with the usual outdated regulations is an impediment to business at every level; one need only to think back to his or her experiences with their local DMV or the new health care website. As an investor be wary of industries that may be hobbled by Government regulation; there will be no innovation. The tendency of congress for the last few years is too pass very broad legislation then let the bureaucrats define it. When you think about this and realize that most career bureaucrats are now unionized you should be afraid, be very afraid.
Sunday, November 9, 2014
Stock Market Hysteria & Tulips
By: Murray Stahl -Circa 2013
Could a mere tulip bulb be worth $76,000? It is if people are willing to pay for it! It may sound preposterous, but this is exactly what happened in Holland in the 1630’s. It’s a story that sometimes describes the Antique Car market and our Investor World. These are my two main interests and I often revisit this parable in times of Market Stress.
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The seeds of this craze were planted in 1593. A man by the name of Conrad Guestner imported the first tulip bulb into Holland from Constantinople, in present day Turkey. After a few years, tulip bulbs became a status symbol and a novelty for the rich and famous. Eventually, tulip bulbs became a hot ticket item in neighboring Germany, as well. After some time, a few tulip bulbs contracted a non-harmful plant virus called mosaic. The effects of this mosaic virus were tulip petals with beautiful “flames” of color. This unique effect furthermore increased the value of the already rare and highly exclusive tulip bulb.
Initially, only the true connoisseurs bought tulip bulbs, but the rapidly rising price quickly attracted speculators looking to profit. It didn’t take long before the tulip bulbs were traded on local market exchanges, which were not unlike today’s stock exchanges. By 1634, tulip mania had feverishly spread to the Dutch middle class. Pretty soon everybody was dealing in tulip bulbs, looking to make a quick fortune. The majority of the tulip bulb buyers had no intentions of even planting these bulbs! The name of the game was to buy low and sell high, just like in any other market. The whole Dutch nation was caught in a sweeping mania, as people traded in their land, livestock, farms and life savings all to acquire 1 single tulip bulb!
In less than one month, the price of tulip bulbs went up twenty-fold! To put that into perspective, if you had invested $1,000 and came back on month later, your investment would have ballooned to $20,000! Now you can understand the mad rush to buy tulip bulbs at any cost. Tulip bulb mania affected the public psyche to an extreme. One drunk man in a bar started peeling and eating what he thought was an onion, while it was in fact it was the bar owner's tulip bulb on display. This man was jailed for many months!
All common sense and logic was thrown to the wind, and even scoffed at. This is exemplified by how many USEFUL items it cost to buy 1 single tulip bulb:
• four tons of wheat
• eight tons of rye
• one bed
• four oxen
• eight pigs
• 12 sheep
• one suit of clothes
• two casks of wine
• four tons of beer
• two tons of butter
• 1,000 pounds of cheese
• one silver drinking cup.
Mind you, these valuable items COMBINED only equaled the value of 1 tulip bulb! The modern day value of these items is over $40,000!
In 1636, tulips were trading hands on the Amsterdam stock exchange as well as on exchanges in Rotterdam, Harlem, Levytown, Horne and many other exchanges in other nearby European countries. These exchanges started to offer option contracts to speculators. These option contracts allowed tulip bulbs to be speculated upon for a fraction of the price of a real tulip bulb. This allowed people of lower means to speculate in the tulip market. Additionally, options allowed for leverage. Due to leverage, option buyers were able to control larger amounts of tulip bulbs, allowing a greater profit. In a previous example, we showed how a $1,000 dollar investment would have yielded $20,000 in one month. As if this weren’t enough, option leverage allowed this same investment of $1,000 to balloon into $100,000! Unfortunately, leverage is a double-edged sword. If the tulip bulb price moved downwards ever so slightly, the option buyer’s investment would be lost and they might even owe money! Talk about risky. But at this point, it was commonly believed that the tulip market was immune to crashing and that it would “always go up”.
After some time, the Dutch government started to develop regulation to help control the tulip craze. It was at this point that a few informed speculators started liquidating their tulips bulbs and contracts. It was these people, or the smart money, that secured large profits that were now in the form of cold hard cash. In addition, more tulip bulbs were added to the supply due to people harvesting new tulip bulbs. Suddenly tulip bulbs weren’t as quite as rare as before. The tulip market began a slight down trend, but shortly after started to plummet much faster than prices went up. Suddenly the market began a widespread panic when everyone started realizing that tulips were not worth the prices people were paying for them. In less than 6 weeks, tulip prices crashed by over 90%. Fortunes were lost. Wealthy became paupers. Bankruptcies were everywhere due to the negative side of option leverage. People that traded in farms and live savings for a tulip bulb were left holding a worthless plant seed. Many defaults occurred, where speculators couldn’t pay off their debts.
The Dutch government avoided intervening, only to advise tulip speculators and owners to form a council to attempt to stabilize prices and mend public confidence. Every one of these plans failed miserably, as tulip prices plummeted even lower than before.
Assembled deputies of Amsterdam nullified all of the contracts purchased at the height of the mania. The supreme judges of Amsterdam declared all tulip speculation to be gambling, and refused to honor these contracts. As a result, payments were not enforced by any of Holland’s courts. This further fueled the market crash.
The financial devastation that followed the tulip bulb crash lasted for decades, crippling Dutch commerce. The price of tulips at the height of the mania was $76,000; 6 weeks later they were valued at less than one dollar! The only people who prospered from the insanity were the smart money who liquidated at the top.
In market manias, the investors are acting irrationally. Excessive greed causes people to feel financially invincible and make decisions that cause financial devastation. This process occurs regardless of if the market is a commodity market or a paper market like stocks. The moral is clear; the only way to survive is to be the smart money.
As in all thing, “the more things change, the more they stay the same.” The next time you see a nondescript antique car auctioned for big bucks take a seat in your garage, sip a beer and think of tulips. It goes without saying that investing in the stock market “Story Stocks” can resemble the old game of “missing Chairs,” if you have to buy into a bubble be sure you're not left without a chair!
The message is, “be careful out there.”
By: Murray Stahl -Circa 2013
Could a mere tulip bulb be worth $76,000? It is if people are willing to pay for it! It may sound preposterous, but this is exactly what happened in Holland in the 1630’s. It’s a story that sometimes describes the Antique Car market and our Investor World. These are my two main interests and I often revisit this parable in times of Market Stress.
-------------------------------------------------------------------
The seeds of this craze were planted in 1593. A man by the name of Conrad Guestner imported the first tulip bulb into Holland from Constantinople, in present day Turkey. After a few years, tulip bulbs became a status symbol and a novelty for the rich and famous. Eventually, tulip bulbs became a hot ticket item in neighboring Germany, as well. After some time, a few tulip bulbs contracted a non-harmful plant virus called mosaic. The effects of this mosaic virus were tulip petals with beautiful “flames” of color. This unique effect furthermore increased the value of the already rare and highly exclusive tulip bulb.
Initially, only the true connoisseurs bought tulip bulbs, but the rapidly rising price quickly attracted speculators looking to profit. It didn’t take long before the tulip bulbs were traded on local market exchanges, which were not unlike today’s stock exchanges. By 1634, tulip mania had feverishly spread to the Dutch middle class. Pretty soon everybody was dealing in tulip bulbs, looking to make a quick fortune. The majority of the tulip bulb buyers had no intentions of even planting these bulbs! The name of the game was to buy low and sell high, just like in any other market. The whole Dutch nation was caught in a sweeping mania, as people traded in their land, livestock, farms and life savings all to acquire 1 single tulip bulb!
In less than one month, the price of tulip bulbs went up twenty-fold! To put that into perspective, if you had invested $1,000 and came back on month later, your investment would have ballooned to $20,000! Now you can understand the mad rush to buy tulip bulbs at any cost. Tulip bulb mania affected the public psyche to an extreme. One drunk man in a bar started peeling and eating what he thought was an onion, while it was in fact it was the bar owner's tulip bulb on display. This man was jailed for many months!
All common sense and logic was thrown to the wind, and even scoffed at. This is exemplified by how many USEFUL items it cost to buy 1 single tulip bulb:
• four tons of wheat
• eight tons of rye
• one bed
• four oxen
• eight pigs
• 12 sheep
• one suit of clothes
• two casks of wine
• four tons of beer
• two tons of butter
• 1,000 pounds of cheese
• one silver drinking cup.
Mind you, these valuable items COMBINED only equaled the value of 1 tulip bulb! The modern day value of these items is over $40,000!
In 1636, tulips were trading hands on the Amsterdam stock exchange as well as on exchanges in Rotterdam, Harlem, Levytown, Horne and many other exchanges in other nearby European countries. These exchanges started to offer option contracts to speculators. These option contracts allowed tulip bulbs to be speculated upon for a fraction of the price of a real tulip bulb. This allowed people of lower means to speculate in the tulip market. Additionally, options allowed for leverage. Due to leverage, option buyers were able to control larger amounts of tulip bulbs, allowing a greater profit. In a previous example, we showed how a $1,000 dollar investment would have yielded $20,000 in one month. As if this weren’t enough, option leverage allowed this same investment of $1,000 to balloon into $100,000! Unfortunately, leverage is a double-edged sword. If the tulip bulb price moved downwards ever so slightly, the option buyer’s investment would be lost and they might even owe money! Talk about risky. But at this point, it was commonly believed that the tulip market was immune to crashing and that it would “always go up”.
After some time, the Dutch government started to develop regulation to help control the tulip craze. It was at this point that a few informed speculators started liquidating their tulips bulbs and contracts. It was these people, or the smart money, that secured large profits that were now in the form of cold hard cash. In addition, more tulip bulbs were added to the supply due to people harvesting new tulip bulbs. Suddenly tulip bulbs weren’t as quite as rare as before. The tulip market began a slight down trend, but shortly after started to plummet much faster than prices went up. Suddenly the market began a widespread panic when everyone started realizing that tulips were not worth the prices people were paying for them. In less than 6 weeks, tulip prices crashed by over 90%. Fortunes were lost. Wealthy became paupers. Bankruptcies were everywhere due to the negative side of option leverage. People that traded in farms and live savings for a tulip bulb were left holding a worthless plant seed. Many defaults occurred, where speculators couldn’t pay off their debts.
The Dutch government avoided intervening, only to advise tulip speculators and owners to form a council to attempt to stabilize prices and mend public confidence. Every one of these plans failed miserably, as tulip prices plummeted even lower than before.
Assembled deputies of Amsterdam nullified all of the contracts purchased at the height of the mania. The supreme judges of Amsterdam declared all tulip speculation to be gambling, and refused to honor these contracts. As a result, payments were not enforced by any of Holland’s courts. This further fueled the market crash.
The financial devastation that followed the tulip bulb crash lasted for decades, crippling Dutch commerce. The price of tulips at the height of the mania was $76,000; 6 weeks later they were valued at less than one dollar! The only people who prospered from the insanity were the smart money who liquidated at the top.
In market manias, the investors are acting irrationally. Excessive greed causes people to feel financially invincible and make decisions that cause financial devastation. This process occurs regardless of if the market is a commodity market or a paper market like stocks. The moral is clear; the only way to survive is to be the smart money.
As in all thing, “the more things change, the more they stay the same.” The next time you see a nondescript antique car auctioned for big bucks take a seat in your garage, sip a beer and think of tulips. It goes without saying that investing in the stock market “Story Stocks” can resemble the old game of “missing Chairs,” if you have to buy into a bubble be sure you're not left without a chair!
The message is, “be careful out there.”
Saturday, November 8, 2014
SPLV--Try some lower volatility in your Portfolio –
Circa November 2014
If you get heartburn watching the up-down daily churning of the market then low-volatility equity may be for you. They have worked for me, full discloser; I have significant positions in both of the ETFs and discussed in this post.
The Daddy of all low-volatility positions is PowerShares, S&P 500 Low-Volatility Portfolio under the symbol (NYSEARCA, SPLV. Their claim to fame is that they take the 100 lowest volatility stocks from the S&P 500 Index as the positions in the ETF. Of course these 100 stocks would be traded at a much slower rate than the other 400 S&P 500 stocks so you would think that you would surrender some growth with these 100 stocks.
In point of fact in times of market turmoil SPLV has outperformed the full S&P 500 index that’s mirrored by ETF (SPY). In the last 45 days SPY fell by 1% while SPLV gained 1.5%, a 2.5% swing. The overall price-earnings (P/E) ratio of SPLV is 19.
SPLV sells at $37 a share today (a 52 week high) and pays a dividend of 2.4% while SPY ($203) pays a Dividend of 1.8%. As for trading volatility from 2011 to today SPLVs worst 3 month performance over those three years was --5.31 (SPY was –29.6%) and SPLVs best 3 month gain was 12.28% (SPY enjoyed a 26.8% best 3 month return).
So it appears that there is a performance cost to owning SPLV over the entire S&P 500 Index (SPY). I use SPLV as a kinda surrogate for the “Fixed-Income” portion of my portfolio. With the current close to zero interest rate return this works for me.
I have significant shares of SPLV at much lower prices and will add shares if it corrects to $35-$36 a share (2 to 3 percent or so.) I would only add to my position in SPY at a very significant market break of well over 10%. It’s a good vehicle but at over $200 a share I think it’s too big a chunk of cash in a single vehicle, at least for me it is.
Happy Trails, Murray
Friday, November 7, 2014
Well here we are embarking on an effort to jointly find our way through the thicket of Stock Market noise. I consider myself a relatively experienced investor. I’ve been retired for well over 16 years without a pension and lived a very good life on my investment results. Our nest-egg has increased each year of our retirement in spite of robust spending. Oh, to be sure there were many mistakes made but mistakes are a learning experience for us all. Through these many years I’ve somewhat formulated a philosophy that lets me sleep at night while invested in the market. I have no agenda and nothing for sale as we begin this Journey.
In my other life I was a Director of Logistics for a US company with a main plant in the US and auxiliary plants in Germany, Belgium and England. I have a lifelong interest in Antique cars and at present have an eclectic mix ranging from Corvette to Studebaker. With my first and only Wife I split my time between our homes in South Florida and Upstate New York. We enjoy our nine Grandkids that range in age from 20 to 1 ½ years old. In short I think of myself as “everyman”.
I’ve discovered that the US Stock Market most resembles a teenage Girl who has discovered she has a Zit; there is huge drama over “things” that mean little over the long haul. I faithfully read the Wall Street Journal and the Economist. When I watch CNBC I mute the sound as I’ve found that their commentators job is to attract viewers not inform them and Bad news attracts eyeballs to their station. Everything they say is coached as exciting news yet they are completely prohibited from really advising the investor class. CNBC is Stock Market noise.
I will periodically provide the “Gentle” reader with some recommendations and be forewarned that they usually will be picked by my main criteria, Capital Preservation. It goes without saying that I welcome comment either positive or negative since it’s always the case that dialog increases knowledge. It’s always the case that as you explain something to another you yourself gain a greater understanding of the subject.
Murray
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