The Dow Jones hit a new record high yesterday, and as I write, it's higher for the day today.
Should you be cheering? If you're about to sell some stocks, yes. Otherwise, why bother?
If you're still buying stocks for your retirement, why would you cheer? The amount deducted from your paycheck will buy fewer shares of stock than before. More shares of stock are good.
True, the total market value of the shares of stock you have already bought is higher, and that makes you feel good . . . but so does cocaine, and it's not good for you in the long run.
Ideally, you should want stock prices to remain very low until right before you sell them -- then have them shoot up.
Of course, in real life they go up and down in unpredictable fashion and don't try to please you, me or anyone else.
The first quarter 2007 GNP is the lowest in 4 years. Will that bring the market down? Maybe.
Northwest Airlines emerged from bankruptcy. Will that bring the market up? Maybe.
stock market records
stock market records
Thursday, May 31, 2007
Tuesday, May 22, 2007
Read CAPITAL IDEAS by Peter Bernstein
Last week I felt the need for a organized, comprehensive, textbook-ish explanation of Modern Portfolio Theory and other related modern financial concepts. I found several in Amazon that looked, but are expensive so I delayed ordering them.
But Sunday I checked out the book CAPITAL IDEAS by Peter Bernstein, thinking it was a history of Wall Street, and from reading the first 50 or so pages last night, it's obviously the comprehensive look at Modern Portfolio Theory I've been looking for, though written in a more interesting way than most textbooks, and organized in a way that makes sense to me, as a history or chronology of the events. Plus, he goes into what he knows of the personal lives of the people involved, helping to humanize the events.
I remember seeing glowing reviews of his book on risk, but didn't realize before the value in his earlier books. This is the first one of his I've read, and now I know I'll be reading the rest.
Burton Malkiel's A RANDOM WALK DOWN WALL STREET is good but doesn't explain these things in the step by step order of their historical development. So if you've read that book but you're still fuzzy on how the pieces fit together, CAPITAL IDEAS seems to be the solution.
Capital Ideas
Capital Ideas
But Sunday I checked out the book CAPITAL IDEAS by Peter Bernstein, thinking it was a history of Wall Street, and from reading the first 50 or so pages last night, it's obviously the comprehensive look at Modern Portfolio Theory I've been looking for, though written in a more interesting way than most textbooks, and organized in a way that makes sense to me, as a history or chronology of the events. Plus, he goes into what he knows of the personal lives of the people involved, helping to humanize the events.
I remember seeing glowing reviews of his book on risk, but didn't realize before the value in his earlier books. This is the first one of his I've read, and now I know I'll be reading the rest.
Burton Malkiel's A RANDOM WALK DOWN WALL STREET is good but doesn't explain these things in the step by step order of their historical development. So if you've read that book but you're still fuzzy on how the pieces fit together, CAPITAL IDEAS seems to be the solution.
Capital Ideas
Capital Ideas
Thursday, May 17, 2007
Dividends and immediate gratification
In thinking about the usual need of people for immediate gratification, I'm surprised that so many people are hypnotized by the prospect of future capital gains versus immediate dividend or income income.
Increasing stock prices is one reason why companies buy back their own stock is to increase share value.
However, you can't spend any of this money until you sell the stock.
But apparently people feel an immediate gratification just from seeing a rise in the price of their stocks, even though they can't spend that money until they sell, and when they do they'll have to pay a hefty percentage to the government for capital gains tax. People get immediate gratification just from seeing the market value of their portfolio increase.
Plus, it's also true that, depending on when you buy the stock, it may be months before you receive that first dividend check. The market price can go up right after you buy it. But you actually have to wait a while for the dividend checks.
And, admittedly, the dividend yield on most stocks is so low that you have to buy a large amount of stock to get any kind of substantial check. And if you can afford to buy $20,000+ worth of stock at one time, the small percentage of current dividends still must not seem like much money to you.
The numbers for bonds and some other investments are larger than for most common stocks, but admittedly still don't seem a large return relative to the value of the money used to buy the security.
So, the magnitude of the numbers involve twist reality to make people think that they have big capital gains even though can't spend them, but dividends aren't worth waiting for, even though that's the current and ongoing reward for owning stock, which you can spend.
If you're going for capital gains and mistake market value for money in the bank, you think you still have all your original money plus the capital gains which could be much larger than any dividends.
financial immediate gratification
financial immediate gratification
Increasing stock prices is one reason why companies buy back their own stock is to increase share value.
However, you can't spend any of this money until you sell the stock.
But apparently people feel an immediate gratification just from seeing a rise in the price of their stocks, even though they can't spend that money until they sell, and when they do they'll have to pay a hefty percentage to the government for capital gains tax. People get immediate gratification just from seeing the market value of their portfolio increase.
Plus, it's also true that, depending on when you buy the stock, it may be months before you receive that first dividend check. The market price can go up right after you buy it. But you actually have to wait a while for the dividend checks.
And, admittedly, the dividend yield on most stocks is so low that you have to buy a large amount of stock to get any kind of substantial check. And if you can afford to buy $20,000+ worth of stock at one time, the small percentage of current dividends still must not seem like much money to you.
The numbers for bonds and some other investments are larger than for most common stocks, but admittedly still don't seem a large return relative to the value of the money used to buy the security.
So, the magnitude of the numbers involve twist reality to make people think that they have big capital gains even though can't spend them, but dividends aren't worth waiting for, even though that's the current and ongoing reward for owning stock, which you can spend.
If you're going for capital gains and mistake market value for money in the bank, you think you still have all your original money plus the capital gains which could be much larger than any dividends.
financial immediate gratification
financial immediate gratification
Tuesday, May 15, 2007
Chinese stock market boom times
The AP today carried an interesting story about the stock market boom in China. The Shanghai Composite Index has gone past the 4000 mark. And it could go past 5000 in a month. This, on top of a 130% increase last year.
One broker was quoted as saying that 6 months ago they opened 4-5 new accounts a day - now it's 40-50 a day.
This trading is called, "chao gu" -- stir-frying stocks.
And people are mortgaging their homes and dipping into retirement funds to buy their shares of stock. Trading volume in Shanghai and a smaller exchange in Shenzhen recently exceeded all other stock markets in Asia -- including Tokyo.
A 60-year old cleaning lady doubles her initial investment of 20,000 yuan in two months -- and is celebrated in the media.
P/E ratios are around 30 to 40 -- still well below 1999 Internet and high tech stock pinnacles in the US.
Yet the article concludes with the observation by a Chinese woman that, "We hear that before 2008, the government won't let the prices fall. We're not afraid."
Personally, I think somebody ought to be afraid. True, China's economy is growing at about 10%, an incredible rate. But so much of what the article describes sounds like 1999 all over again.
Apparently bank accounts pay just 3% dividends. I don't know if there's anything equivalent to American certificates of deposit or CDs, but the Chinese want higher growth.
I'd think the Chinese government would also be frightened of this boom. If everybody panics and wants to sell, how are they going to keep prices up, whether the 2008 Olympics have taken place or not?
China's huge push for growth comes out of a need to employ millions more people every year. Plus, there is a lot of unreported unrest in the countryside. If millions of Chinese people see their retirement savings vanish or lose their homes due to a stock market crash, that could cause a lot of damage to the economy, and pose a threat to the authority of the government.
It could soon be interesting times, investing in China.
Chinese stock market boom
Chinese stock market boom
One broker was quoted as saying that 6 months ago they opened 4-5 new accounts a day - now it's 40-50 a day.
This trading is called, "chao gu" -- stir-frying stocks.
And people are mortgaging their homes and dipping into retirement funds to buy their shares of stock. Trading volume in Shanghai and a smaller exchange in Shenzhen recently exceeded all other stock markets in Asia -- including Tokyo.
A 60-year old cleaning lady doubles her initial investment of 20,000 yuan in two months -- and is celebrated in the media.
P/E ratios are around 30 to 40 -- still well below 1999 Internet and high tech stock pinnacles in the US.
Yet the article concludes with the observation by a Chinese woman that, "We hear that before 2008, the government won't let the prices fall. We're not afraid."
Personally, I think somebody ought to be afraid. True, China's economy is growing at about 10%, an incredible rate. But so much of what the article describes sounds like 1999 all over again.
Apparently bank accounts pay just 3% dividends. I don't know if there's anything equivalent to American certificates of deposit or CDs, but the Chinese want higher growth.
I'd think the Chinese government would also be frightened of this boom. If everybody panics and wants to sell, how are they going to keep prices up, whether the 2008 Olympics have taken place or not?
China's huge push for growth comes out of a need to employ millions more people every year. Plus, there is a lot of unreported unrest in the countryside. If millions of Chinese people see their retirement savings vanish or lose their homes due to a stock market crash, that could cause a lot of damage to the economy, and pose a threat to the authority of the government.
It could soon be interesting times, investing in China.
Chinese stock market boom
Chinese stock market boom
Dividends and delay gratification
So much of investing, as so much of life, is a push-pull between the present and the future.
The better you resist the temptation to overeat bad foods now, the healthier you'll be in the future.
Same with exercise -- the more healthy exercise you do now, the better you'll be in the future.
The more money you save now, the more you'll have in the future. If you go into debt, you're really stealing from you're own future.
Yet it's so difficult to follow this through consistently. I've tried to tell young adults that they should start saving money, and they just start giving me excuses. Someday they'll be 50 or 60 and wish they'd taken my advice -- but they won't listen now. They'll have to learn the hard way. They just won't be convinced that if they'd work hard now, save a lot of money and let it grow, they could live like queens and kings in later life.
But "later life" is just not real to them yet. Drinking with their friends tonight is. The latest CD is real. The latest electronic toy. They just don't believe that if they give up those things now, they'll have much more pleasure later.
There's a similar dynamic with income investing. The best long-term income investments are the stocks of good dividend paying companies that consistently raise their annual dividends. Mergent has a list of about 300 companies that had raised their dividends every year for at least 10 years.
Yet, because the current dividend yield is so low, many income investors buy bonds, for the higher yield today. Even though the semi-annual coupon of bonds never goes up.
In 20 years, the dividend-paying stocks will be paying far more for the money they cost than bonds. But it will take 15 years or more to get to that point, and who wants to wait that long?
dividend investments
dividend investments
The better you resist the temptation to overeat bad foods now, the healthier you'll be in the future.
Same with exercise -- the more healthy exercise you do now, the better you'll be in the future.
The more money you save now, the more you'll have in the future. If you go into debt, you're really stealing from you're own future.
Yet it's so difficult to follow this through consistently. I've tried to tell young adults that they should start saving money, and they just start giving me excuses. Someday they'll be 50 or 60 and wish they'd taken my advice -- but they won't listen now. They'll have to learn the hard way. They just won't be convinced that if they'd work hard now, save a lot of money and let it grow, they could live like queens and kings in later life.
But "later life" is just not real to them yet. Drinking with their friends tonight is. The latest CD is real. The latest electronic toy. They just don't believe that if they give up those things now, they'll have much more pleasure later.
There's a similar dynamic with income investing. The best long-term income investments are the stocks of good dividend paying companies that consistently raise their annual dividends. Mergent has a list of about 300 companies that had raised their dividends every year for at least 10 years.
Yet, because the current dividend yield is so low, many income investors buy bonds, for the higher yield today. Even though the semi-annual coupon of bonds never goes up.
In 20 years, the dividend-paying stocks will be paying far more for the money they cost than bonds. But it will take 15 years or more to get to that point, and who wants to wait that long?
dividend investments
dividend investments
Wednesday, May 9, 2007
Inflation and TIPS bonds
One of the biggest risks of income investing is inflation. If you insist on picking stocks and selling them, you'll lose a lot of money that way. Income investors avoid that stupidity, but they still have to deal with the creeping loss of purchasing power. That's one of the discouraging things. Traditionally, income investors have bought bonds, but these are subject to inflation.
One good idea that happened during the Clinton administration was the introduct of Treasury Inflation Protection Securities which are basically zero coupon bonds with the government growing them faster as inflation rises.
How have the elderly traditionally dealt with inflation? Well, before World War 2, it wasn't an issue. If you had enough income from bonds then you continued to have enough income from bonds, although in the long run that could vary somewhat as interest rate levels rose and fell. Still, they didn't do that to extremes.
inflation TIPS bonds
inflation TIPS bonds
One good idea that happened during the Clinton administration was the introduct of Treasury Inflation Protection Securities which are basically zero coupon bonds with the government growing them faster as inflation rises.
How have the elderly traditionally dealt with inflation? Well, before World War 2, it wasn't an issue. If you had enough income from bonds then you continued to have enough income from bonds, although in the long run that could vary somewhat as interest rate levels rose and fell. Still, they didn't do that to extremes.
inflation TIPS bonds
inflation TIPS bonds
Monday, May 7, 2007
France to roll back socialism?
Hell froze over yesterday, which is another way of saying that the conservative candidate in France's presidential elections beat the rear end of the socialist candidate, and one of the first things he says is that France is going to be a friend of the United States from now on.
Plus he's going to make some much needed economic reforms to rollback socialism in France. All of which will be good for investing, since the more financial freedom people have anywhere in the world, the greater the wealth creation within the world. That's good for investors all over the world, whether they invest in stocks, bonds or even money market funds.
We saved Eastern Europe from communism, only to see Western Europe fall to socialism. Hopefully this is a sign that the continent is not totally and hopelessly lost.
French investments
French investments
Plus he's going to make some much needed economic reforms to rollback socialism in France. All of which will be good for investing, since the more financial freedom people have anywhere in the world, the greater the wealth creation within the world. That's good for investors all over the world, whether they invest in stocks, bonds or even money market funds.
We saved Eastern Europe from communism, only to see Western Europe fall to socialism. Hopefully this is a sign that the continent is not totally and hopelessly lost.
French investments
French investments
Sunday, May 6, 2007
Immigration and Social Security
I'm a little late, but most of you know that on May 1 various groups advocating changes in immigration law put on rallies in cities around the country.
Immigration is an interesting issue for many reasons, and very complicated. What does it have to do with investing?
First, unless you're savings up a lot of money and investing for income, you probably will depend on Social Security for income in your old age.
Yet all projections show that once us baby boomers start retiring in large numbers, there's going to be a huge gap between what the younger generations are paying into the Social Security trust funds and what the baby boomer retirees will technically be eligible for given their work records of paying into the system while they were employed.
I'm convinced that the reason leaders in both the Republican and Democrat parties don't crack down on illegal immigration and are proposing faster routes for illegal aliens to become citizens is that they're hoping that young immigrants working and paying Social Security taxes will "rescue" the SSA system for us baby boomers.
Yes, it's true that many illegal aliens work for cash. But many have Social Security numbers or use Social Security numbers of other people. This means that FICA taxes are taken out of their paychecks and sent to the Social Security trust funds.
Every year, the Social Security Administration sends every American over the age of 25 an Earnings and Benefit Statement showing their total gross wages for the past years. If the number for a year on your statement is larger than you expect, check your W-2 forms. Maybe an illegal alien is using your number.
Horrors? Hardly -- they're increasing your eventual retirement check. You can go to your local SSA office and have them take the earnings off your earnings record . . . but guess what? The trust fund is not going to return the money to anybody! If you don't keep the credit for those earnings, nobody will -- but the government will keep the money in the trust funds.
In THE FUTURE FOR INVESTORS Dr. Jeremy Siegel states that he believes that retirements for American, European and Japanese baby boomers will be funded by young investors in India, China and other developing countries buying up the stocks and bonds of our companies.
I don't know if that's true. Or whether it's desireable if true. But I believe the government's response to the immigration situation comes from the hope that illegal aliens will eventually fund the Social Security trusts.
immigration and Social Security
immigration and Social Security
Immigration is an interesting issue for many reasons, and very complicated. What does it have to do with investing?
First, unless you're savings up a lot of money and investing for income, you probably will depend on Social Security for income in your old age.
Yet all projections show that once us baby boomers start retiring in large numbers, there's going to be a huge gap between what the younger generations are paying into the Social Security trust funds and what the baby boomer retirees will technically be eligible for given their work records of paying into the system while they were employed.
I'm convinced that the reason leaders in both the Republican and Democrat parties don't crack down on illegal immigration and are proposing faster routes for illegal aliens to become citizens is that they're hoping that young immigrants working and paying Social Security taxes will "rescue" the SSA system for us baby boomers.
Yes, it's true that many illegal aliens work for cash. But many have Social Security numbers or use Social Security numbers of other people. This means that FICA taxes are taken out of their paychecks and sent to the Social Security trust funds.
Every year, the Social Security Administration sends every American over the age of 25 an Earnings and Benefit Statement showing their total gross wages for the past years. If the number for a year on your statement is larger than you expect, check your W-2 forms. Maybe an illegal alien is using your number.
Horrors? Hardly -- they're increasing your eventual retirement check. You can go to your local SSA office and have them take the earnings off your earnings record . . . but guess what? The trust fund is not going to return the money to anybody! If you don't keep the credit for those earnings, nobody will -- but the government will keep the money in the trust funds.
In THE FUTURE FOR INVESTORS Dr. Jeremy Siegel states that he believes that retirements for American, European and Japanese baby boomers will be funded by young investors in India, China and other developing countries buying up the stocks and bonds of our companies.
I don't know if that's true. Or whether it's desireable if true. But I believe the government's response to the immigration situation comes from the hope that illegal aliens will eventually fund the Social Security trusts.
immigration and Social Security
immigration and Social Security
Saturday, May 5, 2007
Beware of mutual fund charges
If you have money in mutual funds, I hope you're doing it the smart way. Readers of my blog are too smart to invest their money in load mutual funds, right? You wouldn't put your money in a mutual fund that charges you a front end load, right? Please say you know better than that.
That front end load is 2-8% of your money that you lose right off the top, as your immediate "reward" for choosing that particular mutual fund out of the only 8000 or more that you could have chosen. That load goes into the pockets of the mutual fund company and is split with the broker or financial planner who conned you into sending your money there.
Studies have proven -- mutual funds that charge a load don't perform any better than no-load funds, no matter what that broker or financial planner who wants to get a commission from you claims.
Also beware of mutual funds that charge you a rear-end load -- that's a charge to withdraw your money. However, I admit I can sympathize with that one somewhat, since I believe that once you invest in something like volatile like stocks, you should be keeping your money in for the long haul.
What many people don't realize, however, is that even no-load mutual funds can charge 12b-1 fees to pay for all the advertisements they place in financial magazines. Also, they do charge management fees.
Management fees are legitimate, of course -- they aren't running the mutual fund for free. However, many funds take out an amount that's so large it dramatically affects your long-term performance.
That's why if I were going to invest in a mutual fund, I'd almost certainly pick Vanguard, which has notoriously low expenses. There're not the only ones, but they're a safe bet.
But personally I'd rather not invest in mutual funds. Their only advantage over owning individual stocks is diversification, and you can obtain that with exchange traded funds.
"Expert" management is often touted as an advantage of mutual funds, but since numerous studies have shown that actively managed mutual funds underperform the market in the long run, this to me is a disadvantage, not a benefit.
beware mutual funds
beware mutual funds
That front end load is 2-8% of your money that you lose right off the top, as your immediate "reward" for choosing that particular mutual fund out of the only 8000 or more that you could have chosen. That load goes into the pockets of the mutual fund company and is split with the broker or financial planner who conned you into sending your money there.
Studies have proven -- mutual funds that charge a load don't perform any better than no-load funds, no matter what that broker or financial planner who wants to get a commission from you claims.
Also beware of mutual funds that charge you a rear-end load -- that's a charge to withdraw your money. However, I admit I can sympathize with that one somewhat, since I believe that once you invest in something like volatile like stocks, you should be keeping your money in for the long haul.
What many people don't realize, however, is that even no-load mutual funds can charge 12b-1 fees to pay for all the advertisements they place in financial magazines. Also, they do charge management fees.
Management fees are legitimate, of course -- they aren't running the mutual fund for free. However, many funds take out an amount that's so large it dramatically affects your long-term performance.
That's why if I were going to invest in a mutual fund, I'd almost certainly pick Vanguard, which has notoriously low expenses. There're not the only ones, but they're a safe bet.
But personally I'd rather not invest in mutual funds. Their only advantage over owning individual stocks is diversification, and you can obtain that with exchange traded funds.
"Expert" management is often touted as an advantage of mutual funds, but since numerous studies have shown that actively managed mutual funds underperform the market in the long run, this to me is a disadvantage, not a benefit.
beware mutual funds
beware mutual funds
Friday, May 4, 2007
Baby boomer retirements hanging over our heads
It's inevitable that my thinking about investing and investments also be tied up with the concept of retirement. That's because I'm facing retirement in the not too distant future. Also, because so are about 78 million of my fellow baby boomers.
It's very unlikely that we'll treat old age the same as our parents.
Based on the expectation that baby boomers will begin selling stocks at age 65 to meet their retirement expenses, a lot of people expect stocks to go into a long bear market starting roughly 2009 or 2010. I'm not so sure the moment will be a dramatic, for several reasons.
It's unlikely every baby boomer who turns 65 will immediately sell all their stocks and go into bonds.
Not all baby boomers will turn 65 at the same time. When the first bunch hit 65, there'll still be many millions of us who are not yet 65, and still buying up stocks for our retirement funds.
From what I read, people who want their resources to last for the rest of their life, should not sell off more 4% of their assets in a year. Baby boomers following that advice will not immediately sell everything right away.
Many baby boomers will simply switch jobs and careers to something they enjoy doing, and so will delay having to live on investments.
A few of us plan to hang on to income-generating investments for the rest of our lives. Why sell stocks that are paying out good dividends? I don't want to live on the total yield generated by selling off shares of stock. Then I'd have to pay too much money to the government in capital gains taxes. I want to live dividends that keep growing every year
baby boomer retirement
baby boomer retirement
It's very unlikely that we'll treat old age the same as our parents.
Based on the expectation that baby boomers will begin selling stocks at age 65 to meet their retirement expenses, a lot of people expect stocks to go into a long bear market starting roughly 2009 or 2010. I'm not so sure the moment will be a dramatic, for several reasons.
It's unlikely every baby boomer who turns 65 will immediately sell all their stocks and go into bonds.
Not all baby boomers will turn 65 at the same time. When the first bunch hit 65, there'll still be many millions of us who are not yet 65, and still buying up stocks for our retirement funds.
From what I read, people who want their resources to last for the rest of their life, should not sell off more 4% of their assets in a year. Baby boomers following that advice will not immediately sell everything right away.
Many baby boomers will simply switch jobs and careers to something they enjoy doing, and so will delay having to live on investments.
A few of us plan to hang on to income-generating investments for the rest of our lives. Why sell stocks that are paying out good dividends? I don't want to live on the total yield generated by selling off shares of stock. Then I'd have to pay too much money to the government in capital gains taxes. I want to live dividends that keep growing every year
baby boomer retirement
baby boomer retirement
Thursday, May 3, 2007
Dow breaks 50-year old streak record
The Dow's best winning streak since 1955!
That's the latest news from the stock market. It's risen 21 out of the last 24 trading sessions -- total gain 7.4%. It's closed at a record high five out of the last six trading sessions.
Am I cheering? Hardly. But I admit that I'm glad that one cause is higher corporate earnings and the other is lower oil prices.
Higher corporate earnings is the backbone of corporate health, enabling companies to pay out more money in dividends, which is good for income investors.
I like lower oil prices as a consumer, though local gasoline prices are rising at the pump -- hitting $3 a gallon for the first time since late 2005.
High stock prices mean that companies that pay out dividends have a lower dividend yield, because their stock price is higher. So it costs more to buy that stream of dividends.
Here's the link to the details:
Dow Jones winning streak
It appears that the second leg of the bubble boom predicted by Harry Dent has begun. According to him, the real strength behind this stock market is the buying of baby boomers. Eventually boomers will start selling (because of retirement) and then the stock market will go into a long bear market.
I don't know if that will happen, but I do know that the long run never arrives, and these figures are not permanently etched in stone. They can go up more. They can go down.
Dow records
Dow records
That's the latest news from the stock market. It's risen 21 out of the last 24 trading sessions -- total gain 7.4%. It's closed at a record high five out of the last six trading sessions.
Am I cheering? Hardly. But I admit that I'm glad that one cause is higher corporate earnings and the other is lower oil prices.
Higher corporate earnings is the backbone of corporate health, enabling companies to pay out more money in dividends, which is good for income investors.
I like lower oil prices as a consumer, though local gasoline prices are rising at the pump -- hitting $3 a gallon for the first time since late 2005.
High stock prices mean that companies that pay out dividends have a lower dividend yield, because their stock price is higher. So it costs more to buy that stream of dividends.
Here's the link to the details:
Dow Jones winning streak
It appears that the second leg of the bubble boom predicted by Harry Dent has begun. According to him, the real strength behind this stock market is the buying of baby boomers. Eventually boomers will start selling (because of retirement) and then the stock market will go into a long bear market.
I don't know if that will happen, but I do know that the long run never arrives, and these figures are not permanently etched in stone. They can go up more. They can go down.
Dow records
Dow records
Tuesday, May 1, 2007
Would Warren Buffett invest in Berkshire Hathaway today?
The issue of BARRON'S I've been reading also has an interesting, contrarian article on Warren Buffett and Berkshire Hathaway -- Questioning the Cult of Buffett by Stephen P. Mauzy.
One criticism is of Buffett's steadfast refusal to split stock shares, so one is now worth upwards to $100,000. He says that the stock market would not be a place for small investors if all companies did this. True, but so what? Berkshire Hathaway is not a huge public company like General Motors.
He makes a good point that most of Berkshire Hathaway's outstanding returns occurred before the past 5 years. The real villain is size. It's grown so large thanks to its past successes. As the author points out, Berkshire Hathaway is in effect a closed end mutual fund.
What's a more serious defect for would-be buyers, is that it's selling at a 60% premium to its net asset value.
Also, I insist, it should pay out a dividend as well. Buffett invests for a high cash return. He is consciously raising the market value of the stock, but it means that money used to buy shares of Berkshire Hathaway today will not return any money to you until you sell it. What is the time value of the money you use to buy a share, when you get no immediate return? And presumably will never get a return because you wouldn't want to buy it while Buffett is still in charge, would you?
Would Buffett buy a stock that pays no dividend, shelling out a 60% premium over its fair market asset value?
Not likely, methinks. If Buffett did that, Benjamin Graham would be spinning in his grave.
Berkshire Hathaway
Berkshire Hathaway
One criticism is of Buffett's steadfast refusal to split stock shares, so one is now worth upwards to $100,000. He says that the stock market would not be a place for small investors if all companies did this. True, but so what? Berkshire Hathaway is not a huge public company like General Motors.
He makes a good point that most of Berkshire Hathaway's outstanding returns occurred before the past 5 years. The real villain is size. It's grown so large thanks to its past successes. As the author points out, Berkshire Hathaway is in effect a closed end mutual fund.
What's a more serious defect for would-be buyers, is that it's selling at a 60% premium to its net asset value.
Also, I insist, it should pay out a dividend as well. Buffett invests for a high cash return. He is consciously raising the market value of the stock, but it means that money used to buy shares of Berkshire Hathaway today will not return any money to you until you sell it. What is the time value of the money you use to buy a share, when you get no immediate return? And presumably will never get a return because you wouldn't want to buy it while Buffett is still in charge, would you?
Would Buffett buy a stock that pays no dividend, shelling out a 60% premium over its fair market asset value?
Not likely, methinks. If Buffett did that, Benjamin Graham would be spinning in his grave.
Berkshire Hathaway
Berkshire Hathaway
Why people don't follow Peter Lynch's advice
I thought about Peter Lynch last night.
I was driving along a stretch of McKnight Road just a little north of Manchester Road, in Rock Hill. It's an area I go down a lot. A year or so ago, this stretch on the east side of the road was pretty much deserted land. As I recall, a tree nursery of some kind used to be there.
But for some months now somebody has been building a group of fancy apartment buildings. And last night I saw a sign up reading, "Luxury Condos - from the Lower 100,000s."
To me, that's serious housing money, and I laughed at the idea of paying that much for a brand new "luxury" condo that had just recently been put together from scratch on land that not long ago was a tree nursery. Plus, I didn't think much of living right there. It's a short way down the road from an apartment complex with some low-lifes in it. It is close to the very nice Tilles Park. It is close to Ladue, which is the St Louis area's wealthiest area. But these condos are separated from the Ladue mansions by plebian areas of Rock Hill. Plus, they're across the street from where I once saw about 20 raccoons late at night all over the road. Plus, it's not far from a poor area that contains some dishonest criminals, so I'd say it's not really a safe area to walk around at night. It is true, though, that there's currently a large building project at McKnight and Manchester that will add a lot to the shopping available, and it's likely the city planners are going to try to move out the criminal element.
However, it's quite likely that soon people will be buying up and moving into those condos and perhaps living quite happily, glad to have such a cheap luxury condo.
Peter Lynch has long advocated that people buy stock in companies they know well from their own employment or their own shopping. Yet many people don't take his advice -- they'd rather invest in a company that sounds exotic.
Familiarity breeds contempt, and that explains why people would rather lose their money in a high tech company they don't understand than invest in a company close to their lives.
(They really should invest in a portfolio that's diversified, using some of the findings of asset allocation, instead of trying to pick any stocks, but many people want to pick stocks.)
Years ago, I used to sell cable TV door to door. I read somewhere that cable TV companies were a good investment, and the one I was selling for one of the best. Did I invest in cable TV? Are you kidding me? It's a high cash business, with all that implies. Sales people ripped off cash (I had a manager fired for stealing to support his cocaine habit, and he was far from the only cocaine user, and I heard that was a commonly used drug in the company headquarters.) Installers sold the cable boxes to customers. And so on.
Plus, I heard constant complaints about poor customer service and picture outages during bad weather.
Yet, years later, the stock had gone up a lot!
peter lynch
peter lynch
I was driving along a stretch of McKnight Road just a little north of Manchester Road, in Rock Hill. It's an area I go down a lot. A year or so ago, this stretch on the east side of the road was pretty much deserted land. As I recall, a tree nursery of some kind used to be there.
But for some months now somebody has been building a group of fancy apartment buildings. And last night I saw a sign up reading, "Luxury Condos - from the Lower 100,000s."
To me, that's serious housing money, and I laughed at the idea of paying that much for a brand new "luxury" condo that had just recently been put together from scratch on land that not long ago was a tree nursery. Plus, I didn't think much of living right there. It's a short way down the road from an apartment complex with some low-lifes in it. It is close to the very nice Tilles Park. It is close to Ladue, which is the St Louis area's wealthiest area. But these condos are separated from the Ladue mansions by plebian areas of Rock Hill. Plus, they're across the street from where I once saw about 20 raccoons late at night all over the road. Plus, it's not far from a poor area that contains some dishonest criminals, so I'd say it's not really a safe area to walk around at night. It is true, though, that there's currently a large building project at McKnight and Manchester that will add a lot to the shopping available, and it's likely the city planners are going to try to move out the criminal element.
However, it's quite likely that soon people will be buying up and moving into those condos and perhaps living quite happily, glad to have such a cheap luxury condo.
Peter Lynch has long advocated that people buy stock in companies they know well from their own employment or their own shopping. Yet many people don't take his advice -- they'd rather invest in a company that sounds exotic.
Familiarity breeds contempt, and that explains why people would rather lose their money in a high tech company they don't understand than invest in a company close to their lives.
(They really should invest in a portfolio that's diversified, using some of the findings of asset allocation, instead of trying to pick any stocks, but many people want to pick stocks.)
Years ago, I used to sell cable TV door to door. I read somewhere that cable TV companies were a good investment, and the one I was selling for one of the best. Did I invest in cable TV? Are you kidding me? It's a high cash business, with all that implies. Sales people ripped off cash (I had a manager fired for stealing to support his cocaine habit, and he was far from the only cocaine user, and I heard that was a commonly used drug in the company headquarters.) Installers sold the cable boxes to customers. And so on.
Plus, I heard constant complaints about poor customer service and picture outages during bad weather.
Yet, years later, the stock had gone up a lot!
peter lynch
peter lynch
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