Income Investing Home

Hedge fund irresponsibility

2007-08-26T10:36:00.000-07:00

Yesterday I ran across an article THE ST LOUIS POST DISPATCH reprinted from THE WALL STREET JOURNAL by Gregory Zuckerman headlined:

"Who's sorry now?

Well, it's not hedge funds"

And it's about how many hedge funds have lost large chunks ("up to one-third") of their customers' money during the recent subprime stock market sell-off and decline.

And they refuse to take any responsibility for it.

According to Zuckerman, they "point fingers at other funds, once-in-a-lifetime events and their own computer programs."

Black Mesa Capital blamed "unprecedented market events."

Those words should put a chill in the hearts of anyone considering handing your money over to a hedge fund.

Yes, the past two months in the stock market are "unprecedented."

Gosh, gee willikers, darn it all to heck, Mr. Wilson!

I've got news for these hedge fund managers who're making millions of dollars -- history is being made every single day!

The future is going to be full of "unprecedented market events"!

Guess what? -- for the millions of dollars those investors are stupid enough to pay you, you're supposed to be prepared.

You're supposed to know how to deal with risk.

It's not like risk is anything new.

It's not like "unprecedented market events" are unprecedented.

The 1929 market crash was unprecedented. The oil embargo of 1973 along with the social dislocation caused by the Vietnam War and the Watergate investigations were all unprecedented to the stock market, which helped it decline dramatically 1973-74. The 520 point 22% crash of October 1987 was unprecedented. The high tech dot com boom of 1995-2000 was unprecedented and so was the Nasdaq tech wreck of March-April 2000.

I'm going out on a limb here, to make a tremendous prediction:

There're going to be a lot more "unprecedented market events" before we all die.

The world's not going to stop changing just because you don't hedge your hedge funds!

hedge fund irresponsibility
hedge fund irresponsibility

Terrorism and Investing

2007-08-21T17:46:00.001-07:00

Here's an interesting article on How Does Terrorism Affect Your Trading.

The focus is on trading of stocks and currencies, which is certainly not my focus, but it's still an interesting read.

And although I don't see a mention of income investing itself, it does discuss long term investing strategies in relation to terrorism attacks. I'd say this - if you're investing for income, you're most likely banking on common human needs and desires. Coca-Cola, not software. Snack food, not biotechnology. Electric lights, not GPS satellites.

Terrorist attacks can certainly harm economies -- as September 11 did to the United States -- but as long as we're alive, we're going to keep on consuming basic commodities. Following September 11, business in the U.S. slowed dramatically -- car sales, restaurant sales and so on. Yet people kept using electric current to watch the news on TV and to eat Hershey's chocolate to deal with the stress.

terrorism and investing
terrorism and investing

Financial Rebel

2007-08-21T08:03:00.000-07:00

I found an interesting blog called Financial Rebel.

I didn't find anything particular "rebellious" about it, but he gives his comments and commentary on the market and various company stocks and their prospects. Some people have found his article on how to own gold through using exchange traded funds useful.

Myself, I favor joining in with businesses that serve human needs, rather than expecting a chunk of metal to pay me money. That could include something such as the Mergent Broad Dividend Achievers Index.

One thing caught my eye in his comments on the current stock market -- it's quite volatile, and that's an open invitation to trading. I agree, but notice that he doesn't tell you how to trade volatility.

If you think that in the current market you want to be a day trader, all I can say is, good luck. You don't need to be reading this blog, you need to be reading the Help Wanted Ads.

But although I'm know expert, I know that the words "high volatility" are music to the ears of an options trader. That means it's tell to sell volality, because the price is high. You do that by selling puts and calls. There are relatively, safe and conservative ways to do that, and after I write and publish my book on investing for income, I'll tell people how to get rich quick by selling calls and puts.

Financial Rebel
Financial Rebel

Dividend Detective

2007-08-19T15:16:00.000-07:00

I found a site that should be interesting for all income investors -- Dividend Detective.

This site is not about any kind of "fixed" or loanership or interest type of investing for income -- just dividends from equity investments. So for those of you who are resisting the double taxation of dividends, this can be a good resource.

But be aware that it's a membership site -- that is, access to much of the information is limited to subscribers. However, you can still obtain good information on, and lists of, dividend paying stocks, Real Estate Investment Trusts (REITs), Master Limited Partnerships (MLPs), CanRoys, closed-end funds, Canadian income trusts, and Business Development Corporations.

But if you want guidance on what to buy and when, you must fork over some cash.

My one gripe is that, from what I can see (and I didn't subscribe, so maybe this is addressed in the premium section for subscribers), the site encourages investing in individual securities. There is market commentary advising that certain ones or types be bought or sold. The whole idea of the site is to advise you on what to buy and sell, and when.

I strongly suggest you stick to exchange traded funds (EFTs) and index mutual funds, if at all possible (and it may not be with some of the most unusual securities, such as Business Development Corporations -- those are not your average every day investment.)

Dividend Detective
Dividend Detective

Bipolar Mr. Market

2007-08-17T10:12:00.000-07:00

Obviously, I can't predict the amount dividends every high-paying stock is going to pay next quarter. But while the Dow and many stock markets around the world tumble on worries about the subprime mortgage industry in the US, and you feel poorer because the market price of your portfolio makes you feel like you just dropped off a cliff, think about this --

Is demand for electricity any less now than before this crisis started?

-- I can't speak for the overall economy, but here in St Louis the temporature has been reaching high 90s and triple digits (Fahrenheit) for over a week. Demand for electricity to run air conditioners is very high.

So has the true value of utility companies dropped?

Is demand for soft drinks any less now than before this crisis started?

-- I can't speak for the overall economy, but I'm pretty sure that lots of people are consuming record quantities of soft drinks, thanks to the terrific heat.

So has the true value of Coca-Cola (KO) and Pepsi dropped?

Is demand for gasoline any less now than before this crisis started?

-- Thanks to people driving and flying on summer vacation trips, I doubt there's been any serious drop in demand for oil and its byproducts.

So has the value of Canadian oil trusts dropped?

I hope you get my point -- don't count on market prices which are driven by market sentiment that blows hot and cold. In modern terms, Benjamin Graham's "Mr. Market" has a severe case of bipolar depressive disorder. He's going through a depressive stage right now.

And considering the amount of bad mortgage loans in the economy, I can't blame him . . . I feel bad when I think about the debts I owe!

But if you count on basic human needs for electricity, gas, snack foods and other such items . . . you can continue to receive income while everybody else is hoping Mr. Market will be happy again.

Bipolar Mr. Market
Bipolar Mr. Market

Canadian income trusts resources

2007-08-15T07:52:00.000-07:00

I've been focused lately on researching Canadian income trusts. These are terrific investments, especially for income investors. Unfortunately, I have learned about them after the Canadian Finance Minister Jim Flaherty proposed to eliminate their tax-free status effective with 2011.

He proposed this on October 31, 2006, so it's become known as the Halloween Massacre.

Anyway, all income investors should be aware of the profits from Canadian royalty trusts which they can share in -- through receiving monthly dividend trusts. I've previously linked to the beginning of the information pages on my actual site, but I've also written:

Canadian Income Trusts -- Time to Buy or Dump? -- article in Ezine Articles

Review of Canadian Income Funds book in Go Articles

The Safest Way to Profit From Investing In Canadian Income Funds -- on my new Squidoo lens on Canadian income trusts.

If you're not already familiar with Squidoo, it's a fairly new site that allows you to put up pages on subjects you're interested in and knowledgeable about. It encourages the marketing of your own products and as an affiliate.

Despite the government's proposal to end income trust taxation, these are good investments now -- and it's possible that the proposal will never be passed into law. If you're a Canadian citizen, write to your members of Parliament.

Canadian income trust resources
Canadian income trust resources

Dividend Yield Hunter site

2007-08-09T09:54:00.000-07:00

This site has its heart in the right place -- investing for income -- and so I wanted to like it more than I did:

Dividend Yield Hunter

One problem is that its domain name is misleading . . . it's focused on non-dividend income investments -- REITs, Canadian trusts, preferred stocks, and so on. It even lists some high-yielding money market accounts.

But it totally ignored common stocks that pay dividends, so it misses the biggest way to grow income faster than inflation in the long term.

It lists some basic information on each type of investment, and then lists some of them. It contains interesting information on shipping and transportation stocks. I'd thought they were high-yielding simply because the shipping business is so strong right now. That's the impression I got from reading various sales letters for financial newsletters sent to me. But apparently these companies get a tax break from the government. So that's interesting to know.

On a technical level, this site is poorly laid out. I had to scroll right and left, and move the screen around a lot. It badly needs a web design makeover to make it user-friendly.

It does contain some news and opinion, also. It has a model portfolio, but now real plan (although to its credit it does say that it doesn't support trading.)

Comparing it to my site, I have to rank mine higher in terms of appearance and usability. I think I do a better job of giving in depth information about the investments, but I don't even try to keep up with news, so I don't give yields, which will change constantly. However, this site currently covers more types of investments than I do (yet - many more pages will come in the not too distant future). I also do not give an overall plan on my site -- but I am writing a book that will give a plan.

It's a good place to see a wide range of income investments and to get a list of some of them, so it's not a bad place to begin your research.

Dividend Yield Hunter
Dividend Yield Hunter

Global warming municipal bonds on the way?

2007-08-06T12:36:00.001-07:00

Here's an idea for a new type of bond -- global warming bonds

Only I have to admit, the story is quite vague on details about how such bonds would work. Selling an issue of bonds would raise money -- but what would they spend the money on to reduce carbon emissions?

Also -- and very important to anybody who'd be crazy enough to invest in such bonds -- how would the bond debt be serviced? By the issuing government? Out of what revenue? General tax revenues?

One way or the other, I'm sure the taxpayers of this country are going to pay out the nose to solve this problem, if problem it is indeed.

However, unless they're a clear and rational use of the bond issuance money to generate income from whatever activity is done to reduce carbon emissions, then I'd strongly advise you to NOT add global warming bonds to your fixed income portfolio.

Global warming bonds
Global warming bonds

Canadian income trusts -- doomed or not?

2007-08-05T17:29:00.000-07:00

I've just completed the beginning of a new section of my site on income investing -- on Canadian income trust funds.

So I just checked out the latest news, and it doesn't look good for those who've been hoping to stop the government of Canada from beginning to tax trusts in 2011:

You can read about that here:

Canadian trust fund taxation

The Conservative Party of Canada seems determined to shoot itself in the foot. It barely won the January 2006, where it promised no new taxes. So many Canadian voters feel betrayed by this broken campaign promise.

Plus, as the land of oil and natural gas in a politically stable country, Canada is well poised to benefit from the rising prices of energy, not to mention that most of these energy assets are in unstable and unfriendly places such as the Middle East, Russia and Venezuela. Of course the government knows this -- and wants to grab a big chunk of tax money.

I am sort of sympathetic to the "Why should trusts get away with not paying taxes when corporations have to" argument. My answer is that, simply, neither trusts nor corporations should have to pay taxes. It doesn't really make sense. Business structures are not people. Eliminate all double taxation. Just impose taxes on dividends received by individuals. This would make eliminate a lot of inefficiency.

Yet this is politically impossible. Liberals in Canada as well as the U.S. act like corporations themselves are evil rich people and it'd be a crime against the poor not to tax them.

Canadian income trusts
Canadian income trusts

2007-08-04T13:03:00.000-07:00

Here's a site I found recently that could help you -- their focus is in the right places for income investors -- REITs, energy master limited partnerships, unit trusts, preferred bonds and convertible preferred bonds, fixed income bonds, royalty trusts . . . this site keeps up with yield, prices, news and so on.

ePreferreds Online

Only trouble, it's not free.

They also publish the Yield and Income Newsletter, which covers these same topics on a monthly basis.

I have two reservations.

1. Their newsletter recommendations are from major banks and brokerages. Yes, I know they're the professionals, but they must take a short term approach. They're also the institutions that encourage people to overtrade their stocks.

2. If you follow the news about which REITs are up, which master limited partnerships are down, which preferred bond issues look good, which royalty trusts don't etc -- you'll be tempted to start buying and selling your portfolio. If you get all this information and advice, you might make the mistake of actually trying to use it.

I much prefer a long term approach of diversifying your portfolio with high quality yet high yielding securities of all these types -- and holding them forever.

So I suggest you subscribe while you're still building a portfolio, to take advantage of current trends -- then forget about whether or not bond yields are too high or too low. Cash or reinvest your checks, but spend the rest of your time enjoying life or working a job or business that makes you even more money to invest.

Income Investing Site
Income Investing Site

Next -- Dow 15,000 or 10,000?

2007-07-29T13:11:00.000-07:00

Stocks go up, stocks go down.

Do you feel poorer today than you did a week ago, thanks to the 700 pount loss in the Dow Jones Industrial Average?

If so, may I suggest that you need to rethink your investment strategy?
Another long time aphorism came to my mind in thinking about the latest decline in the Dow -- easy come, easy go.

The DJIA went from 13,000 to 14,000 in just 56 days.

Did that 7.7% rise in under 2 months reflect the American economy rising 7.7% in under 2 months? Of course not.

Yet a week ago, millions of investors were once again congratulating themselves on how smart they were to be buying stocks. I have o quarrel with that in general -- it's when you start thinking of market price rises as cash in your pocket, that I suggest you're out of touch with reality.

The truth is, we don't know the future. I don't know whether the market is going to rise or fall tomorrow, and neither do you. Nor do any of the paid commentators and talking heads.

What's more, we have no idea whether the DJIA has attained any unpenetrable "floor" . . . is there an absolute limit on how fair the DJIA can go down now that's at just over 13,000 and has been over 14,000?

We'd like to think that the DJIA will never see 10,000 or 7,000 or 1,000 again -- but we don't know. You have no guarantees. What if Al Quaida terrorists succeeded in setting off atomic or dirty bombs in multiple major American cities, including Manhattan where the New York Stock Exchange is based? How far down would the DJIA go? Who knows? Will that ever happen? I sure hope not. But we have no guarantees.

Nor do we have guarantees against biochemical terrorism, or a natural problem such as bird flu or natural catastrophes such as the flooding global warming allegedly will bring.

The trouble with called price rises in your stocks "capital gains" is that they all too often don't reflect real gains in REAL capital. The traditional economic definition of "capital" is not simply a profit made selling an investment -- that's the IRS's definition -- no, it's the productive assets of one kind or another.

Land, warehouses, forklift trucks, patents. Cash in the bank is simply the liquidity used to obtain capital assets or to pay the expenses associated with running them.

If the stock market were strictly rational, the price of a company's stock would go up only to the degree that the company achieved success in expanding its net capital assets. The price of the overall stock market would go up only to the extent that overall economic activity expanded the value of the country's net capital assets.

Obviously, the stock market is not strictly rational. Efficient, yes -- but not rational.

Of course, a strictly rational stock market would not go up or down in sharp, fast bursts. It wouldn't be so exciting, but you would still have the advantage of participating in the overall growth of the nation's economy. That's still a big advantage over money market accounts.

And if you buy only stock that pays dividends, then you get quarterly checks in your mailbox whether the market price is up or down. Use this drop in the Dow to buy dividend-paying stocks cheap.

They may never be this low again.

(Or maybe they'll get a lot lower -- but you don't know that, and you don't know when. So buy now to start collecting dividend checks now.)

Dow down 700
Dow down 700

What if . . . something unprecedented affects your investments?

2007-07-24T08:05:00.000-07:00

Sometimes I wonder whether my way of thinking helps or hurts me when it comes to income investing and investing in general.

I think that if I were to try to get a "real" job in the financial world, I'd be at a disadvantage. That's because the general financial community accepts historical returns and situations, but I'm a long-time science fiction reader (and very minor writer) and therefore am used to asking, "But what if . . . ?"

For example, to the conventional, statistically savvy financial mind, the sun is not going to blow up tonight simply because it's been existence over 4 billion years and hasn't yet blown up. To most people, the sun going nova is simply an incomprehensible event.

But as a science fiction reader I'm used to thinking about suns going nova. If a particular star is about to go nova, it's going to go nova even though it's been in existence for billions of years, and therefore provided billions of mornings to any planets in its solar system.

My only comfort is my understanding -- hopefully not wrong or out of date -- that our particular G class, yellow sun is of a type that doesn't go nova. I put more faith in the findings of astronomers who've studied many stars that have gone nova or not than I do in the narrow, statistical viewpoint of, it hasn't happened in the past 4 billion years so it's not going to happen.

Sorry, but if there's something inside the sun that's about to make it go nova, all the statistics in the world won't stop it.

But, as I mentioned, I'm sure that pension fund managers charged with obtaining optimal performance at a given degree of risk are not interested in statistically highly improbable "long tail" events that may make their forecasts based on historical results irrelevant.

Yet the world is always changing, and sometimes the statistically improbable happens. In 1998 the Long Term Capital Asset "hedge" (I use quotes because they did not hedge their trades, but rather leveraged them 100 to 1 or more) fund placed a lot of money -- huge amounts of it borrowed -- on a derivative contract based on the historical relationship between United States and Danish government bonds.

In the summer of the 1998, a "what if" occurred that they didn't think of, despite their Nobel prizes in Economics and PhDs and Masters . . . The sun didn't go nova, but the Russian stock market did "melt down" -- losing about 90% of its value. This, following the Asian currency crisis of 1997, frightened people in developing countries around the world so much that the shipped all the cash they could to the United States and bought United States Treasury bonds, driving their price far past its historical relationship with Danish government bonds.

Net result -- Long Term Capital Asset not only lost all its investors' money and went bankrupt, the New York Federal Reserve Bank had to intervene to prevent a massive breakdown of the United States (and, probably, world) financial systems.

So . . . what if millions of retiring baby boomers start selling their non-dividend paying, "growth" stocks?

What if . . . ?
What if . . . ?

Dow 14,000, and on up!

2007-07-23T08:41:00.000-07:00

I meant to mention it earlier, but I did notice that the Dow Jones Average closed above 14,000 for the first time in history. Hip, hip hooray!

If you're accumulating stock, you should be sorry that the shares you are going to be buying now will be more expensive -- but only Warren Buffett and I seem to have figured that out. It seems to be immutable human nature in everyone else to place more importance on the total value of the stock shares they've already bought than on the price they're going to pay in the near future.

One reason is that we celebrate capital gains over dividends is the difference in tax treatment. This was alleviated by President Bush's tax cuts of 2003, but unfortunately that law is temporary. If Democrats are in charge in the future, they've made it known that they'll allow the lower tax rates on dividends to expire.

This would be bad, but I still advise investing for income. To get the preferential tax treatment on capital gains, you still have to realize those capital gains by selling them. And with many stocks after the baby boomers start to retire, you may not have any capital gains.

But the run up to Dow 18-20,000 foretold by Harry S. Dent seems to have begun.

DOW 14,000
DOW 14,000

Austrian School economic prophesy

2007-07-22T11:02:00.000-07:00

Is the world and U.S. economy in a bubble which will inevitably break?

This article maintains that it is, based on the work of the Austrian School of economics:

Austrian economics

I don't know, of course. And just because the current leaders of the Austrian school think we're in a worldwide bubble, doesn't mean Hayek and van Mises would think so if they were still alive.

The dislocations which the author mentions all result from the drastic lowering of the value of the U.S. dollar. Perhaps India's stock market is valued more than the U.S. stock market in part because so many financial newsletters, including some from Agora, Inc -- the author's employer -- emphasize how much India and China's economies are growing in relation to the rest of the world.

If India were as economically developed as the U.S., its stock market obviously would be worth a lot more than the U.S., since India has 3-4 times as many people.

The advice to put 20% of your portfolio into gold, I think is crazy. Especially after reading Peter Bernstein's book The Power of Gold, which is a terrific argument against everything "gold bugs" such as this author say.

My own advice is to put all of your portfolio into income-generating investments such as stocks that pay dividends, if if you need to use DRIPs (Dividend ReInvestment Plans). Gold is just a metal -- it doesn't write you any checks, and it costs money to store safely.

I'm not saying the price of gold won't go up in the future -- perhaps tremendous just as the gold bugs are predicting.

But the problem with that is the same problem I have with buying stocks and other investments for capital gains. You can't realize your profit without selling the gold/stocks. And then you miss out on future gains, plus you must pay capital gains taxes.

There's at least one gold mining stock -- BHP Billiton -- that does pay dividends. If gold goes up, its dividends will likely go up. So you could buy shares of that company if you want to hedge your portfolio with gold.

Austrian doom and gloom
Austrian doom and gloom

Smart Capitalist blog

2007-07-18T18:56:00.000-07:00

I found a website with a great domain name. I wish I'd thought of grabbing it -- Smart Capitalist.

It's a blog, and of course I was attracted to the article on High Income Investment Cash Cows.

I like the general thrust, but take issue with a few items. One, although energy and pharmaceutical companies are in the news a lot, that doesn't mean they're not cash cows, so they're not in the same category as high tech stocks. Some energy and pharmaceutical companies return a lot of cash. Obviously, oil and natural gas and energy itself are rising in price. And pharmaceutical companies have a good business in that once they find an effective drug and get it approved, it's a high margin business. The drug itself is almost "digital" in that it can be replicated very cheaply. The high price is not due to the ingredients, it's to pay for the research. So once a drug makes back its research costs, it's a big money maker.

He mentions insurance, too. I don't recall seeing insurance companies in the high dividend paying lists, but maybe they're just behind the biggies (REITS, consumer goods, utilities, banks). After all, Warren Buffett bought Geigo Insurance for Berkshire Hathaway, so he expected it a large cash flow from it. They buy a lot of clever and entertaining radio ads, so I assume they're still making good money.

smart capitalist
smart capitalist

The Gold Standard Not So Golden?

2007-07-17T08:24:00.000-07:00

Reading The Power of Gold by Peter Bernstein makes me think again about gold as the money standard. I posted before my misgivings about how mining gold apparently creates wealth, instead of the formation of new, better and cheaper goods and services. Bernstein's story dramatize the effect of gold (usually negative) on economies through history, including what happened when Spain stole so much gold and silver from the New World.

And if the economy activity of a country increases, how does that automatically increase the supply of the gold metal? It obviously doesn't.

Yet the concept of hard money is still very popular. Conservative talk show hosts like to promote gold-buying services. I remember when Laura Ingraham interviewed Ron ?, a popular economic commentator and analyst (his own radio show used to be carried here in St Louis on Saturday night, but unfortunately they dropped him). She was surprised that Ron joked that everybody should own enough gold to "bribe the border guards."

The price of gold can go up, but this is not the same as the benefits of a passbook savings account. It's solid metal that doesn't itself pay any money or interest.

Bernstein is building a strong historical case for saying that gold is a liability rather than an asset, at least when you take it beyond its function as decorative jewelry and an electrical component. It's not money, is the message I've gotten from the book so far. And when you try to make it money, it's dangerous.

And the glory years when the world was on the gold standard? This was not the norm. The gold standard in the sense of pegging a country's currency to a fixed price for gold and saying that your paper currency is always redeemable into gold -- that's a product of the 19th century through the beginning of World War I. As somebody during that period said, and which Bernstein quotes enough times to make it clear he agrees, the gold standard was not the cause of the world's prosperity during that period -- it was a result of it.

I'm looking forward to reading what he has to say about modern times and finances.

gold standard
gold standard

MAKING 36% by Dr. Terry F Allen

2007-07-15T11:02:00.000-07:00

Fuller Mountain Press sent me a small book for review: MAKING 36%: Duffer's Guide to Breaking Par in the Market Every Year In Good Years and Bad by Dr. Terry F Allen.

It's basically a lead generator book. That is, if you read it, get excited and want to begin its program -- but you're understandably intimidated by the work involved -- you can enroll in his email trade notification service.

Basically, he advocates making 36% by putting on calendar spreads. These are option trades that take advantage of the difference in volatility between LEAPS (Longterm Equity AnticiPation Securities) and short term options.

Unless you're already an accomplished options investor, I know that's as clear as mud. I've read about calendar spreads before, but I found his explanation somewhat difficult to read in detail. Yet, I know reason to doubt that it works. I'm simply doubtful that too many people can put on these trades and also make the necessary periodic adjustments simply from reading this book. I'd certainly hesitate to risk my money on that. But again -- that's all the more reason why you need his email service.

So far as I know, his method his standard. He does confine his calendar spreads to one particular equity -- one which I wouldn't have guessed, so it's not fair of me to reveal it here.

Plus, he provides a great service by giving us the name of a broker that allows us to do option trades within an IRA. That is terrific news for all of us saving for retirement.

For more information, go to Terry's Tips

calendar spreads book
calendar spreads book

Chinese investment advisor blogger arrested

2007-07-13T07:44:00.000-07:00

This story about the arrest of a Chinese investment tips blogger is interesting, and scary in several ways.

Chinese investment tips blogger arrested

First, it reveals that the Chinese government gives warnings by first arresting people. This is apparently their warning to other such people giving investment tips. This guy did apparently go beyond giving his advice, as I myself do on this blog -- he made over $1 by selling investment advice. Here in the U.S. I'd be breaking the law if I gave individual investment advice since I'm not legally qualified to do that. (Though if you want to pay me $1 million, I might consider risking the penalties! :) )

Secondly, the investing psychology of the Chinese people is a boom mentality. A few weeks ago I read an article about how some woman believed that the Chinese government would not let the stock market crash before the Olympics of 2008.

So many Chinese investors apparently think they're now getting a free ride from the stock market -- it's going to keep going up and make them rich because the government won't let it, at least before the 2008 Olympics, to keep from losing facing internationally.

They may even be right, which means the whole question becomes, will they all pull out right before/during or after the Olympics? And, who's going to pay for it all?

Thirdly, the Chinese people also want the security and comfort of taking investing advice, including tips on specific companies, from other people who supposedly are experts. I could be wrong, but I suspect that right now there're not a lot of Chinese shareholders who have heard of the Efficient Market Theory, asset allocation, diversification or the benefits of index funds.

Chinese investment blogger arrested
Chinese investment blogger arrested

Euro headed down thanks to euro-boomers?

2007-07-11T12:40:00.000-07:00

So Richard Lehman is complacent about the coming baby boomer retirement "crisis" -- in the United States. Interestingly, he's not so complacent about what's going to happen soon in Europe. In his viewpoint, Europeans are too used to living on the welfare state. As I said in my last entry, he expect American boomers to just keep on working until they can afford to stop.

He expects European boomers to stop working and demand that their governments pay the promised retirement benefits -- no matter what.

Since few of them have this money (most Western European Social Security systems are in worse financial condition than that of the U.S.), they're going to have a problem meeting this demand. Also, birth rates in Europe in the past 30 to 40 have been lower on average than that in the U.S. Therefore, there're going to be even fewer workers per retireee than in the U.S.

Therefore, Western European governments are going to have to run their printing presses full-time, to send their baby boomer generation the pensions they've been promising them since they established their post-World War 2 welfare states.

End result -- the euro will be inflated and lose value in comparison to the dollar.

So the current situation where the euro is at a record high against the dollar won't last more than a few years or so.

euro baby boomer retirement crisis
euro baby boomer retirement crisis

NO USA baby boomer crisis, says author

2007-07-09T10:15:00.000-07:00

I just read Income Investing Today: Safety & High Income Through Diversification by Richard Lehman, and he casually dismissed the upcoming
baby boomer retirement crisis.

No problemo, he says. Most baby boomers just aren't going to retire, at least not for many years.

He notes that in 1935 when the Social Security Act was passed in the United States, the average life expectancy was 64. Therefore, they knew in advance that over half of all workers weren't going to collect Social Security at all!

Now life expectancy is in the 80s. There's no reason to stop working at age 65, and so baby boomers won't. They'll be too scared of running out of money before they die.

This will bolster the Social Security trust funds, because these older workers will keep paying into the system. Plus, they won't be drawing checks until they reach the age (I think it's now 70) when they can receive full checks no matter how much money they earn.

This will also bolster the Medicare trust fund, because these boomers will still be covered by health insurance (though he doesn't seem to think about how much demands will be placed on health insurance companies by covering so many people in the 60s and 70s).

I think he's correct to a degree, but it won't be as smooth as he implies. For one thing, I'm sure that most baby boomers will not want to continue working at the same job they've hated for the past 30 years.

Start an online auction business, yes. Sell macrame designs, yes. Teach English to children in Nairobi, yes. Open up a bait shop in the Ozarks, yes.

Keep working the same, dull boring job -- no.

no baby boomer retirement crisis
no baby boomer retirement crisis

The Power of Gold

2007-07-08T15:31:00.000-07:00

I've started reading Peter Bernstein's next book, The Power of Gold. Its theme can be discerned from the subtitle: The History of an Obsession. Its focal point seems to be the old story of a man who was transporting his fortune -- in the form of many pounds of gold -- when this ship he's on is hit by a bad storm. He strapped the gold to his body and of course it drags him to the bottom of the ocean. He didn't have the gold -- it had him.

Still, as always, Bernstein weaves a fascinating narrative of belief and history. I'm pretty sure that when we get to modern times, he's not going to come down on the side of those who believe that we should return our money to a gold standard.

But this book's copyright is in 2000, before the current run-up in gold's price. Are we in the early stages of a new bull market in gold? Should we care?

My own attitude is shaped by the realization that gold doesn't dividends, although it's possible for gold mining stocks to do so. It's not common, though BHP Billiton is a top international dividend paying stock.

gold
gold

Income Investing Book

2007-07-04T19:30:00.001-07:00

Today I just made an important addition to my income investing site - I launched by sales letter for the book YES, YOU CAN BE A SUCCESSFUL INCOME INVESTOR! by Ben Stein and Phil DeMuth.

It's a good book, the one which opened my eyes to the absurdity of throwing money at common stocks in the hopes of capturing capital gains in the future, which you can't profit from without selling the stock and losing future.

In the near future I will finish my own book on income investing, but in the mean time you can read about Stein and DeMuth's here:

Income Investing for Baby Boomer Retirement

income investing book
income investing book

Preferred Stock Investing -- good book

2007-07-04T19:23:00.001-07:00

I've finished reading PREFERRED STOCK INVESTING by Doug K Le Du and I'm quite impressed.

While I've been (justifiably) writing about the temporary, unpredictable nature of capital gains of common stocks, this guy has been looking at preferred stocks -- and figured out a system to capture the capital gains that many preferred stocks have, particularly during periods that interest rates are decreasing.

To reinforce his point that this system is very safe, he continually contrasts it with the benefits of certificates of deposit, but finds that he can usually get a total return more than 3 times that of a CD. He claims that the risk is the same. I'd say that's not true -- but it's true that the risk of high quality preferred stocks is low. He has criteria for screening out the risky ones.

If you work his system for enough years, you may eventually lose some money to a company that goes out of business, but it'll be rare. In the meantime, you can make a lot more money than with a certificate of deposit.

This book is a lead generator for his email notification service, which charges you for the information to work the system. However, he's fair - the book gives enough information to work the system yourself. But it'll take some time and trouble and paying fees to some websites, so it's probably cheaper to let him do the work for you if you're going to commit to making money this way. The price of this service may change, but it's quite reasonable - a lot less than I expected, in fact. I pay more a month for my Internet access.

And the worst that can happen is -- you collect quarterly dividend checks that are probably 3 times higher than the interest a CD would be paying you.

preferred stock investing
preferred stock investing

Preferred stock investing

2007-07-03T20:32:00.001-07:00

I wouldn't have thought there was anything exciting about investing in preferred stock, but it turns out I've been wrong. I'm reading PREFERRED STOCK INVESTING by Doug K Le Du. I haven't finished, but it's clear he's outlining a clever way to take advantage of the ups and downs of preferred stock prices that result from interest-rate changes.

Figure out the interest rate trend, combine with his knowledge of how preferred stocks work, be very selective in your buying of these stocks (he gives 10 strict criteria, and only one to three such preferred stocks are newly issued every month), buy them cheap (using a smart method I'd never heard of), and then hold them until they reach their maximum value.

While I don't believe he can predict interest rate rises and falls, you can figure out the overall trend -- enough to use this system to make a profit.

I also like how one of his principles is reducing work. I think far too many financial/investing writers want readers to do tremendous amounts of research, read annual reports and so on.

My one possible objection is that his system does include selling for capital gains. However, finding new preferred stocks to "ride" on their way up, and using a smart system to get predictable capital gains is so different from common stocks that I am inclined to think this may be worth it. I'll reserve judgment until I've finished reading the book.

You can get it at: preferred stock investing.

preferred stock investing
preferred stock investing

Dividends versus Capital Gains Part 4

2007-06-27T12:44:00.001-07:00

Bernstein also gives an unfair example -- unfair because, to make a rational argument, he uses an extreme and emotional example.

In 1974 Consolidated Edison voted to suspend paying dividends, because they were faced with a financial crisis. Many investors were upset, and Bernstein quotes a woman as saying that since her husband died Con Ed had to be her husband and support her.

Now, Bernstein is correct that in this extreme situation the board of Con Ed did the correct thing. A bankrupt company can't pay dividends. I'm not saying that a company should pay dividends that it needs to survive.

But that's not the normal situation. The textbook argument is not that a company pay dividends and go bankrupt or stay in business . . . it's that a company should not pay dividends to expand the business or invest in other, more productive businesses.

Shareholders are co-owners of the business. They should see some return (and I mean REAL, spendable return -- not the kind of "returns" that most financial writers refer to when they call capital gains a 'return' even though NOTHING has been returned to the shareholder by the rise in stock price) on their investment -- or else they'd be better off in bonds.

Let's say you bought a McDonald's franchise. When it's new you'd have to buy equipment, the building, and so on. Once it's established, it should reinvest some profits in maintaining or replacing needed equipment, interior decorating, advertising, and so on -- if the current number of fryers and grills and satisfying the customer demand, it doesn't need to buy new ones in the hope that if it does, more customers will walk into the restaurant.

Given that reality, who would blame the franchise owner for taking some of the profits out of the business? Nobody, except Bernstein.

Given these many issues, I think it's quite rational for investors to think that $1 in their pocket is worth $2 in the retained earnings of a company whose stock they own.

stock dividends
stock dividends

Dividends versus Capital Gains Part 3

2007-06-27T12:43:00.000-07:00

And what about investors? Bernstein argues that if they need money, they'd be just as well off selling their shares of the company, which in theory are worth that much more, because the company didn't pay dividends.

He writes that it's irrational for an investor to spend $600 in dividends to buy a TV but not to be willing to sell $600 worth of stock (that didn't pay out dividends) to buy the same TV.

But as I've argued above, the share price in the long run is only a little influenced by retained earnings.

If stock prices always reflected a rational evaluation of the company's balance sheet, and balance sheet improvement (or decline) were always 100% reflected in the stock's price rise (or fall), then this would make sense.

But in the real world, stock prices rise and fall every day purely on the give and take of supply and demand, between the bulls and the bears, mostly due to factors beyond the individual companies.

Today's $600 capital gain could easily become tomorrow's $600 -- or more -- loss.

Stock price rises are not permanent.

A dividend check cannot be taken back. The shareholder may waste it, but at least it was theirs to spend, reinvest or lose.

A capital gain is here today, gone next year.

Maybe for a lot of years.

As Bernstein well knows, dividends were the only reason to own stock from the October 1929 crash to 1954, and from 1966 to 1981. Is he saying that if companies had only refused to pay dividends that their stock prices would have gone up despite the Great Depression and World War 2. Despite the social turmoil of the 1960s, the Vietnam War, Watergate, the 1973 oil embargo and the tremendous rise in commodity prices during the 1970s, and the tremendous spike in interest rates?

Does he really want to say that companies could have raised their stock prices during all those problem periods, if only they'd refused to pay out dividends but reinvested the dividends instead?

Given the uncertain and fluctuating nature of capital gains, it's hardly a surprise that investors want to hang on to the shares of stock they own and collect the dividends. When they keep the shares, they can continue to collect the dividends, or even collect capital gains in the future if they so choose.

stock dividends

stock dividends

Dividends versus Capital Gains Part 2

2007-06-27T12:42:00.000-07:00

Granted, many companies just can't afford to pay dividends. New companies that still must make a lot of investments to secure their businesses. Capital intensive companies that have to spend a lot just to keep up with the competition, and so on. Still, I would advocate that most investors stay away from such companies.

The companies that do traditionally pay dividends tend to be older and more established. They can afford to pay them.

One good example is Coca-Cola. It's paid only probably billions and billions of dollars in dividends to shareholders over the course of its long history. If it'd kept all that money, would it be even more successful? Would it have smashed all competition from Pepsi to Vess? Would Coke be sold in every single country in the world, even North Korea? Would every person in the world be buying a 6 pack or more a day? Or that the executives who introduced New Coke would have figured out they were making a mistake?

I don't think so. I could be wrong, but I think Coke has obtained as much brand saturation up to this point as it could have. It will keep expanding in the future, of course, and branching out into different kinds of drinks, but I don't think that there'd be a Coca-Cola bottling plant on every corner of the world if only Coca-Cola had refused to pay its shareholders dividends. I think many people in the world had to wait for various political and technical barriers that had nothing to do with Coke itself to fall. Plus, there're cultural and financial reasons why many people don't buy a drink they're not used to and can't afford. And of course Coke can't buy entry into North Korea or Iran.

I doubt its stock price would be so much higher that its investors would be glad it didn't pay any dividends.

It's Bernstein himself in an earlier section of this book that stresses the action of "return to the mean," or that trees don't grow to the sky, and businesses don't take over entire stock exchanges. At some point, the useful of that cash to the business would have to diminish. Some businesses have a natural limit to their growth, bounded on consumer tastes and other demand for their goods and services.

stock dividends

stock dividends

Dividends versus Capital Gains Part 1

2007-06-27T12:41:00.000-07:00

I was reading Against the Gods by Peter Bernstein again last night, and near the end there's a section about the misperceptions and departures from pure rationality that investors make. I was shocked when I started reading a section that began by saying that there's no rational reason for corporations to pay dividends, or for shareholders to want them to.

As much as I've enjoyed his books up until then, I now have to think that when he wrote that he purely had his head up his rear end. That's a rational academic argument, but it's got no relation to the real world.

The academic argument is that when a corporation pays out dividends, it is losing cash that could be better spent in other ways, such as paying down debt or being invested in some way to make a better return. By being used to improve the company's balance sheet or to make a better business investment, the company's financial position is improved.

This means that the company's stock in theory will be worth more, because the company will be in a better financial situation.

At the time this book was written, capital gains got preferential tax treatment, so an investor receiving dividends paid full tax on them but an investor raising the same money by selling stock paid less in taxes. That's been changed in recent years, but the Democrats plan to go back to socking it to the owners of dividend-paying stocks (anybody who owns dividend-paying stock is obviously rich and evil and needs to have their money taken away from them ((according to class-warfare Democrats)) . . . by I digress.)

(Bernstein didn't mention transaction charges, which favor the dividend receiver over the stock seller who must pay brokerage commissions, but I admit that's minor compared to the tax difference.)

That's a great theory, and a company's stock price does get adjusted for payout of dividends, but that's hardly a major factor in a company's stock price determination. As Bernstein has written about himself, per modern financial theories a company's stock price is mostly determined by the overall market.

How many investors say to themselves, I liked company X at $50 a share but since it just paid out a dividend of 50 cents per share I'm not going to pay over $49.50? Stock buyers that really like that company will buy at market.

Furthermore, it's not real world to say that all cash a company keeps in retained earnings is invested well. Companies can and do waste it. It may just go to give company officers more stock options, which is not a benefit to shareholders. It may go to acquire another company which is a waste of time and effort. Many things can happen to that cash, many of them of no value to shareholders.

The 50 stocks in this Mergent index are not doing poorly in the market place even though they pay dividends.

Not to mention, Enron, Global Crossing and obvious frauds. Most companies and executives are not frauds, but that doesn't mean they're building shareholder value the best way with retained earnings.

stock dividends
stock dividends

Don't sell stock and you don't have to worry about volatility

2007-06-24T16:29:00.000-07:00

Later in Against the Gods, Peter Bernstein comes close to what I'll be writing about in my own book on income investing.

He points out that the volatility Harry Markowitz posits as equal to stock market risk does not matter to "For true long-term investors -- that small group of people like Warren Buffett who can shut their eyes to short-term fluctuations and who have no doubt that what goes down will come back up -- volatility represents opportunity rather than risk, at least to the extent that volatile securitites tend to provide higher returns than more placid securities."

In that sentence he cannot get away from a concern with market price. But he does mention his wife's late aunt who used to boast that she was his only in-law who never asked him what he thought the market was going to do.

"I didn't buy in order to sell," Bernstein quotes his aunt-in-law.

Most people don't understand this attitude -- but it's perfectly logical if you are buying to receive dividends for the rest of your life.

Then you don't need to care about the market price, as long as you continue to receive ever-incresing dividend checks every quarter.
Your only risk is the danger that the company will decrease, suspend or end its quarterly dividend payments.

dividends overcome volatility
dividends overcome volatility

Volatility is a good proxy for risk only if you are a short-term investor

2007-06-24T16:28:00.000-07:00

Against the Gods by Peter Bernstein is subtitled "The Remarkable Story of Risk" though this is somewhat clipped. Obviously, risk as danger is not something that has a story. The book is about the attitudes and techniques people take in facing risk.

We have always faced danger. But we couldn't always buy insurance.

When it comes to stock market investing, Bernstein does finally discuss the nature of risk, when writing about Harry Markowitz's famous paper Portfolio Selection.

Because Markowitz uses volatility as a "proxy" for risk, Bernstein writes. The vast majority of financial writing do not even realize that volatility is not risk per se.

So he does discuss whether or not volatility is a good proxy for risk, or whether there's a better way to deal with it. If you don't look upon volatility as itself dangerous to your money, then stock market investing is less risky than putting your money into
a certificate of deposite that is risky because of its low yield.

volatility does not equal risk
volatility does not equal risk

Value investors exhibit Gambler's Fallacy

2007-06-24T16:26:00.000-07:00

Peter Bernstein continues to raise interesting points in Against the Gods.

He writes about the concept of regression to the mean, and how this has worked as a system of investing for people such as Warren Buffett and other value investors. Although he doesn't mention it, it also explain the Dogs of the Dow technique (before it became well known.)

Not to mention the "magazine cover" effect. This is where people who make the covers of magazines in their fields for their accomplishments often go downhill afterward. SPORTS ILLUSTRATED has actually studied it, because there're numerous examples of players and teams who have never been so good as they were before making the cover of that magazine. One options guru I know of (you likely get mail order advertisements from him) uses magazine covers as a contrary indicator in his system. If a company or CEO makes the cover of a business magazine, it's time to dump the stock!

It also explain the Growth Trap as explained by Jeremy Siegel in his latest book The Future for Investors. When you pay a premium for a stock with great growth prospects, you don't do as well as you do when you put the same money into an investment that is not comparatively overpriced. He compares long term investments in IBM and Standard Oil, and in China and Brazil. (Yes, in the past Brazil has been the better long term investment despite all its political and economic problems and despite China's phenomenal growth -- keep that in mind the next time you get sales letters in the mail telling you that you're going to be poor if you don't invest in China and India.

However, keep in mind Bernstein's caution that it's not always easy to know where the mean is and when the regression will occur. People who invested in the stock market in 1930 because they thought the crash was over lost a lot of money.

In gambling circles, the belief that random results will soon revert to normal because they've been abnormal, is known as the Gambler's Fallacy.

A lot of people have lost a lot of money to casinos because they were sure the roulette's wheel long streak of red "had" to end on the next spin, or 7 had to come up, or the slot machine had to pay off . . .

regression to the mean
regression to the mean

Stock prices are a random walk toward greater wealth

2007-06-24T16:25:00.000-07:00

In another section of Against the Gods by Peter Bernstein, he discusses whether or not the stock market truly moves in a "random walk" -- if it does, the graph of the market should resemble a normal distribution, or bell curve.

He graphed the moves of the markets for every month for 70 years, and found that they did indeed resemble a normal distribution bell curve -- with two differences.

First, there is an upward bias. That is, the long run the stock market does go up. We know that. And it proves that capitalism works. Our free market economic system is, on the whole, creating wealth, and this is reflected in the stock market.

Second, the "long tail" at the left is much bigger than a strict normal distribution would call for. This means, paradoxically, that extreme market moves to the downside happen more frequent than is statistically probable. His graph would have included the 1973-1974 downturn and the October 1987 crash.

Short term market results are not predictable. Stock prices change as a result of new events and information, but these events are unpredictable. Therefore, they add up to a random walk that as Burton Malkiel has described moves upward in the long run, thanks to the wind of economic growth.

If you want steady Eddy market prices you have to go with something like Treasury Inflation Protection Securities that increase in value on a regular basis and also have the benefit of going up at the inflation rate.

random walk
random walk

Nifty Fifty means you can overpay for growth stocks

2007-06-24T16:24:00.000-07:00

Against the Gods by Peter Bernstein continues to contain a lot of concepts that are enlightening me in my research on investing for income.

He discusses Daniel Bernoulli and the Petersburg Paradox, where Peter tosses a coin until it turns up heads. For every toss of tails, Paul must pay Peter a number of ducats doubled from the previous toss. That is, 1,2,4, and so on into infinity. The expected value of being Peter is infinite, but nobody would pay that.

Then he transitions into the late 1960s and early 1970s when it seemed like the Nifty Fifty stocks were going to go up to infinity, and investors bought their shares as though they were worth any amount up to infinity. As though the real risk was in not owning shares in these stocks rather than in owning them, no matter how expensive.

If you know any stock market history, you know what happened. The market crashed in 1973 and hit terrible lows in 1974. The Nifty Fifty fell even farther than other stocks, since they had farther to fall. They did not surpass their December 1972 peaks again until July 1980.

Yet he also points out that they were good stocks and if you'd bought them at reasonable prices and just held on for the long run, you'd have made good money. They didn't grow into infinity, but they did have good growth prospects.

Bernstein doesn't mention this, but I suspect that their dividends made them worth holding on to. The real risks were in paying too high a price for the income stream and in selling those stocks when the prices were low.

Nifty Fifty
Nifty Fifty

Risk and the utility of wins and losses

2007-06-20T07:44:00.001-07:00

I've been reading Against the Gods by Peter Bernstein, which is about risk and how people have learned about probability, how to measure risk, and to some extent control it or use insurance to relieve it.

According to him, it was a man named Bernoulli who first articulated the idea of utility -- that is, that individual people put different emotional values on outcomes. A previous ancient writer said that people should not be so afraid of being struck by lightning, since it happened so rarely. Bernoulli said that people just put a higher emotional importance on the risk of being struck by lightning than of other, more common, dangers.

And Bernstein points out that human life would be a lot less rich if there weren't people who put a lot more value on the reward of taking a risk than they did on the loss they'd suffer from failing. Those are entrepreneurs, explorers and other pioneers who set out to accomplishment something (often at great cost) that is unlikely but which could bring great wealth.

It also explains why I play the lottery. The purely numbers-oriented people say, "The odds are 75 million against you, it's a scam." But I put a greater value on the (admittedly, highly unlikely) wealth I could win than the $2 I lose by playing.

If I didn't play, that $2 would just be absorbed into my daily cash budget, so it has a low utility to me. But I wouldn't have the right to dream of what I'd do if I won.

And who knows? Maybe someday I win. I know the odds are against me, but somebody eventually wins all the money. As long as I have a ticket, it could be me.

If someone has to beg for change on a streetcorner, then they should spend that $2 on the food they need to survive.

If you're depending on the lottery to make you wealth, you need to get off your butt and learn how to make, save and invest more money. You need to perhaps buy some government TIPS bonds to help your savings keep up with inflation.

But don't blame the lottery because some people who play it actually should use that $2 for some other purpose, or because they're too lazy or unambitious to work for wealth in other, more certain ways.

utility and risk
utility and risk

Income Investing Today - new book

2007-06-19T19:10:00.001-07:00

Income investing is becoming a more popular subject. I just found another hardcover book devoted to it in the bookstore today -- Income Investing Today by Richard Lehman. I've got it on order from Amazon and can't wait to read.

Obviously there are many people looking for an alternative place to put their money besides a passbook account in a bank or chasing "growth" stocks that often don't grow - or which soon pop like a balloon.

My only concern is that, from flipping through it, it's obvious that he comes from a fixed income background -- although he prefers to avoid that phrase -- and so focuses on various securities besides dividend-paying stocks. This puts your portfolio at risk from inflation.

Still, it takes dividend-paying stocks years to catch up and then surpass the higher fixed income securities, and money in the present and near-term is worth more than a money in later years.

Income Investing Today
Income Investing Today

Asset allocation period for rebalancing advice is poort

2007-06-17T17:46:00.001-07:00

However, something about the how-to information on asset allocation in both books disturbed me even more than one writer wanting to see patterns in short-term random results.

The advice about rebalancing.

Both of them say that after a period of time you should rebalance your portfolio, selling the assets which have most risen in price and buying more of the assets which have risen the least (or fallen!).

There is no clear cut consensus on how often you should do this, nor even any guidelines. The books mention periods of one year, quarterly, monthly and even weekly -- but leave it up to the reader.

This seems to me an incredible weakness, for several reasons:

1. Using a short period means you have little opportunity to take advantage of long term trends. For example, if you'd started an asset allocation program in 1995 would it have made much sense to sell off all your stocks in 1996? That bull market ran through March 2000.

Also, bear markets can go on for a long time. Some asset allocation programs contain gold. If you'd started an asset allocation program in 1981, your portfolio would by now consist almost entirely of gold . . . how happy would you be about that?

2. If your accounts are not tax-sheltered, you're realizing taxable capital gains, so part of your portfolio's gains are going to the government.

Even tax-sheltered accounts will have increased transaction costs. Brokerages like to rebalance client accounts every quarter. I wonder why they do it so often?

Seems to me that a poor asset allocation program is little better than an HYIP con game.

asset allocation rebalancing flaws
asset allocation rebalancing flaws

Asset allocation assets exhibit random covariance

2007-06-17T17:44:00.000-07:00

Recently I read several books on asset allocation. This is not a full review of them, but I did notice several disturbing points.

One of the books wrote a lot about the variance between difference types of assets, such as stock and bonds. This variance is a critical point for asset allocation, because the theory behind it, Modern Portfolio Theory, comes from Harry Markowitz's work showing that overall portfolio risk is reduced by holding assets that don't go up and down in tandem.

Anyway, the book went on at length about how tricky this is, because the variance of stocks and bonds changes over time, and came up with different variances over 3 year periods in the past.

I had one of those flashes -- and it goes like this.

The stock market moves in a random walk.

The bond market moves in a random walk.

Therefore, whether stocks and bond prices go in different directions through various 3 years periods is . . . ta! da! --

Random.

I mean, at any given moment either market go only be going up, down or sideways. Therefore, sometimes they'll go in the same direction, sometimes they won't.

Yet this book wants you to adjust your allocation periodically on the basis of these random moves.

Look, the whole idea is that you're reducing risk because these two markets both are random, but can go in different directions. But it's obvious that sometimes they'll go in the same direction.

If you want uniformity, put your money in a passbook savings account in a bank.

asset allocation illusion
asset allocation illusion

No level playing field for individual investors aiming for capital gains

2007-06-12T10:11:00.000-07:00

Last night I began re-reading CAPITAL IDEAS by Peter Bernstein and suddenly he gave away an important clue about why individual investors such as you and I are at a disadvantage when it comes to trying to beat the stock market.

He mentioned how much the market's volume has gone from being transactions by individual investors to transactions by funds - pension funds, mutual funds, endowment funds and charitable funds. And he casually mentioned how these were tax-free -- that is, free of all capital gains taxes. He repeated this again a page or two later.

The proverbial light bulb went off over my head. No capital gains taxes! Say what?

I don't know about you, but I never knew that before. To tell the truth, I'd never thought about these funds paying capital gains taxes. I just assumed they did.

I can understand why the government allows them to sell securities without paying capital gains taxes, but it still puts you and I at a significant disadvantage relative to these institutions, when you and I try to compete as stock pickers.

We have to pay capital gains taxes. That's a significant drag on the long term performance of any person buying and selling stock. It's why Warren Buffett's favorite holding period is "forever."

So by not having to pay it, these institutions are making decisions free of a major constraint that we face.

This is a major factor in the stock market -- and nobody's talking or writing about it.

So it's one more good reason why we should be investing for income, not capital gains. Because if we play the buy stocks now so they'll go up and we sell them at a profit game, we're competing against major institutions and fund managers who not only have tremendously more resources (including their time) than we have -- but they don't have to pay capital gains taxes, as we do.

Don't pay capital gains taxes, yet enjoy a cash return from your investments -- buy securities for income, and never sell them.

capital gains disadvantage
capital gains disadvantage

Stocking picking PQ randomly distributed?

2007-06-10T17:52:00.000-07:00

Somewhere earlier in this blog or in an article, I speculated that the great investing success of Peter Lynch, Warren Buffett, John Templeton and a handful of others is not due to them being lucky stock pickers/coin flippers (as the Efficient Market Theory would have to claim), but neither does their success refute the Efficient Market Theory.

According to EMT, it's extremely difficult to beat the market on a long term basis -- but not necessarily.

I speculated that the ability to beat the market long term was made up of a number of personal qualities which were distributed randomly through the human population. So, quite by randomness, those individuals were born with and had the opportunity to develop the qualities that made them able to beat the market.

Therefore, the ability to beat the market still adheres among money managers, pension fund managers and mutual fund managers to a normal distribution, where only a small percentage do in fact beat the market long term.

Yet it's not due to luck in stock picking, but "luck" in the sense they were born with the ability (or, most likely, combination of abilities).

Anyway, in reading CAPITAL IDEAS by Peter Bernstein, he says something to the same effect, calling this beat the market long term ability "Performance Quotient" or PQ and speculates that only a tiny percentage of the population has the genius-level PQ.

He brings up an idea I didn't think of -- that most people with PQ do not manage money for others. They prefer to keep their talent (which still has to be coupled with hard work, just as people with high I.Q.s still have to work hard to come up with genius level ideas) and their investing results to themselves.

I'm not so sure of that -- successful money managers can make a lot of money by managing other people's money. Yet it's also true that the most successful managers are probably just as good or better at selling themselves than at their long term results. And many people with a high PQ may not be good at selling themselves -- it's a separate talent, after all.

Yet Warren Buffett started out forming a limited partnership with friends and relatives.

So who knows -- it's one thing to have a high PQ. It's another thing to have enough money to invest with it so that you can get rich.

Stock Picking
Stock Picking

Profit taking is dis-respecting capital gains - good!

2007-06-08T07:49:00.000-07:00

According to the news, stock investors have spent the last few days "taking profits." Years ago I read a sour comment by a trader that they wished they were taking profits, but in reality was simply trying to get out at less of a loss.

Still, since the overall market did reach record highs early this week, I'm sure that many people did have profitable positions.

So if holding onto stocks for long-term capital gains the optimum procedure, why do the traders who know the market best always rush to convert their capital gains to cash? Could it be they value cash in their hands today more than the nebulous prospect of future capital gains -- capital gains which exist only on paper and which could go up in smoke tomorrow.

$7 trillion in capital gains vanished in March 2000. Today's Dow record could turn into the high water mark of a flood -- a record, but the water's receded. Capital gains come and go.

profit taking
profit taking

Harry Dent's latest bubble boom predictions

2007-06-07T07:46:00.000-07:00

I just got through skimming the latest update from Harry Dent. Dent is the demographer/forecaster who uses demographic information to make stock market predictions, and has an enviable record of calling bulls and bears not based on company info, but on where in the lifestyle spending cycle the baby boom generation is.

In his most recent book, THE NEXT BUBBLE BOOM he predicts that the downturn from 2000-2002 would be followed by another bull market that would dwarf what we saw in the late 1990s -- with the Dow reaching 32,000 to 40,000 by 2010!

What's he saying now? I'll give you a hint - he's found another long-term cycle, the Geopolitical Cycle, which also affects results. And a look at today's headlines make it clear it's not boosting stock market results, although we're having a bull market despite the world's problems.

Dent still calls for a boom but has modifies its extent - and you better know when to get out. Because he's still calling for it to be followed by a long, extended bear market until 2022.

To check out the report, go to:

Harry Dent latest bubble boom report

Dent new forecasts
Dent new forecasts

New Dow Jones Industrial Average Record High

2007-05-31T10:46:00.000-07:00

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

Read CAPITAL IDEAS by Peter Bernstein

2007-05-22T07:45:00.001-07:00

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

Dividends and immediate gratification

2007-05-17T07:50:00.001-07:00

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

Chinese stock market boom times

2007-05-15T20:37:00.001-07:00

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

Dividends and delay gratification

2007-05-15T19:10:00.000-07:00

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

Inflation and TIPS bonds

2007-05-09T12:45:00.000-07:00

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

France to roll back socialism?

2007-05-07T10:21:00.000-07:00

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

Immigration and Social Security

2007-05-06T10:17:00.000-07:00

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

Beware of mutual fund charges

2007-05-05T11:12:00.000-07:00

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

Baby boomer retirements hanging over our heads

2007-05-04T09:53:00.001-07:00

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

Dow breaks 50-year old streak record

2007-05-03T08:07:00.000-07:00

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

Would Warren Buffett invest in Berkshire Hathaway today?

2007-05-01T18:30:00.000-07:00

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

Why people don't follow Peter Lynch's advice

2007-05-01T18:15:00.000-07:00

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

The "Long Run" is Always Far in the Future

2007-04-30T10:40:00.001-07:00

When does the "long run" arrive?

Whenever you read about value investing, you hear that although stock prices bounce around, up and down, in the short term, in the "long run," value the market recognizes value. I don't know about you, but haven't noticed that any stock's price ever stops bouncing around from day to day. Only when trading stops.

Doesn't matter whether it's General Electric or Coca-Cola, which have been trading for over 100 years, or the latest IPO -- the stock's price bounces up and down throughout every trading day.

So, just when is the "long run?" Both stocks have been doing well now for several decades, but both companies went through periods when they didn't look so hot, and their stock prices suffered. Yet those bad periods were still 60 years or more after their IPOs. So were they still not in the "long run?"

It's clear to me that there can be no one, set, truly "correct" price for any company's stock, because during active trading that is going to bounce around constantly due to the flow of sell and buy orders, by the constant battle between bulls and bears, supply and demand. And in the larger picture, that ebb and flow will often produce an up and down trend line.

Did the people who bought General Electric when it was doing a lot worse than now somehow know that Jack Welch would become its CEO? Or did they just figure that GE would somehow attract, find and hire the right person?

With the great increase in interest in the investing culture in investing for capital gains in the past 40 to 50 years, you'd think that somebody pay attention to how ephemeral capital gains actually are, with the vast swings in price. What goes up today can go down tomorrow. What gains are actually permanent? Some price gains are most likely permanent, but nobody knows when that point is reached. Bear markets have in the past taken even good companies down to prices their stocks hadn't seen in many years. And that's just counting the ones that stay in business!

stocks long run
stocks long run

Investing and Social Security

2007-04-29T11:35:00.000-07:00

On Monday, April 23 the Social Security fund trustees reported on the state of the trust fund. It's not pretty. It's one reasons for anybody facing retirement in the next 40 years to save up our own money and not rely on picking the pockets of the younger generation.

It's a prescription for both class and generational warfare.

Unfortunately, politicians have not gotten across the message to the general public that they should not be counting on Social Security for their retirement under it's current setup. You should hedge your retirement investments so that you don't have to count on either Social Security or selling off the stocks and mutual funds you're now accumulating. You should consider selling off all non-dividend paying stocks and paying stocks and bonds that do pay you interest, and hanging on to them -- forever.

Or you risk selling them without having to pay capital gains tax in the future -- because you're selling them at a loss!

Most people don't realize this is related to money, but you should also protect your health also. Quit smoking. Quit drinking to excess. Go on the Zone diet. Get regular moderate exercise. Take nutritional supplements. Don't go on prescription drugs.

The healthier you are, the longer you're able to keep working, which is going to be important to your financial health. Plus, of course, it should be obvious that the healthier you are, the more you'll enjoy all of your life.

The Medicare Part A trust fund is going to start paying out more than it takes in this year -- 2007. It's going broke faster than the regular RSDI Social Security trust fund. Do what you can to stay out of the hospital because you're going to have to pay more and more of it yourself.

investing and Social Security
investing and Social Security

Dow 13,000 Lucky?

2007-04-27T12:52:00.000-07:00

So the Dow Jones Industrial Average has finally reached 13,000. Hip, hip, hoorah!

Myself, I'm of two minds. As a signifying of the national mood, especially the mood of those who have a lot of money, it's a good sign. It seems to show that despite the various economic worries that we have (the War on Terrorism, the decline of the dollar, the rising price of oil, the growing trade deficit, the rise of subprime mortgages, the overall huge consumer debt, the huge business debt etc etc etc), the smart people with lots of money think we'll over the problems.

On the other hand, I think more logically than most people. Warren Buffett is the only other investment writer I know of to point out that stock buyers should want the price of the stocks they are buying to remain low. Really, if you're buying some stock or stocks on a regular basis to save for your retirement, you ideally want the prices to remain low -- until you sell them.

That's because the lower the price of the stock, the more shares you can buy with the money you have.

Let's say you're spending $100 a month to buy a company's stock, and right now the market price is $25. You can buy 4 shares. Let's say that by next month the price has doubled to $50. Yes, you feel good because the value of the shares you've already bought has doubled -- but now your $100 can buy only 2 new shares instead of 4.

For accumulating stock, you want the price to remain low.

But few people look at it that way -- they'd rather be happy that the shares they already own have doubled in value, although they can't do anything with them.

Dow 13000
Dow 13000

Value and Growth Funds Blurring

2007-04-25T17:38:00.001-07:00

The latest issue so BARRON'S has an interesting article on the blurring of the line between growth and value investing mutual funds.

Seems that, because value funds have been doing so well ever since the infamous dotcom boom busted, many "growth" fund managers have been buying value stocks. Well, fair's fair, since during the late 1990s, many "value" fund managers bought into technology, just in time to experience the bust.

This illustrates another reason to avoid mutual funds if possible -- you can't depend on them to buy the kinds of investments they claim to specialize in.

It's also interesting that, according to this article, the line between value and growth investing is blurring. Value and growth managers are loading up on the same companies.

In theory, this could be the best of both worlds -- underpriced stocks that are growing faster than the market. Actually, the article doesn't describe the situation and is a little unclear, except to say that some stocks that were formerly growth favorites -- specifically, Wal-Mart, Microsoft and Dell -- have gotten so big that they can't deliver 20% a year growth any longer.

Personally, when it comes to growth I believe that Dr. Jeremy Siegel has the right idea -- it's a trap. Your returns are lower than you think they'll be because you pay too high a price.

When it comes to value, you may do well if the stock pays dividends, since you're presumably getting a good stream of income for a low price. If there're no dividends, you're engaging in a crap shoot. You may find a future. You may lose your money.

growth and value investing blurring
growth and value investing blurring

The Sharpe Ratio is not a constant

2007-04-25T11:00:00.000-07:00

Recently I read THE 25% CASH MACHINE by Bryan Perry, which described ways to invest for income that most people have never heard of: real estate investment trusts (REITs), Canadian business trusts, Canadian royalty trust, business development corporations, closed end mutual funds (I'm not sure why this is a classification by itself, since the profitability or income yield of any given closed end fund is going to depend on what the fund invests in and how well it's making money, not on being a closed end fund per se), profitable sectors (now likes shipping of oil and bulk materials) and master limited partnerships.

One reader gave feedback on Amazon about how this book should come with a warning label, since it's established financial theory that to get more income you must take on more risk, so anything that pays so much income must have high risk -- Q.E.D.

I'm not defending the book itself -- I thought it described most of those things much too sketchily. I still have many more questions than answers, especially for the more exotic stuff. REITs are well-established and gaining accepting an investments. Besides, you can buy books that do a good job of explaining them. The same is not true of Canadian business trusts, royalty income trusts, business development corporations and master limited partnerships.

But the concepts do seem legitimate. I haven't done all the research I would have to do before investing my money, but I'm not writing them off just because their pay a lot of money.

After all, if every investment gave off the same amount of income given the same degree of risk, every investment would have the same Sharpe ratio and that would be a useless figure, because constant throughout the investment world, and that's just not true.

Isn't it possible some of these investments have high yields because so few investors know about them?

risk and yield
risk and yield

Falling into the growth trap

2007-04-24T08:09:00.000-07:00

The more I read books advising investors to do the opposite, the more I think that what Dr. Jeremy Siegel described in THE FUTURE FOR INVESTORS as The Growth Trap. That is, because of the promise of greater growth, investors overpay, and therefore getting lesser returns than investors who put their money in relatively cheaper investments. And this is true even if the growth story holds up (which of course it often doesn't, especially in the long run). And this is especially true of investors who are reinvesting dividends along the way, because each time they buy new shares of stock with their dividends, they are getting fewer shares of the growth stock than investors do of the nongrowth stock.

So over time, investors in the more boring stock acquire more and more shares of it, and therefore in the long run are paid more and more in dividends.

This finding is being generally overlooked, since it's counter-intuitive and certainly unsexy. And also goes against the advice of numerous books on investing.

I'm reading a book on REITs and the author writes about how there's a trade-off between REITs that pay higher dividends now and those that retain more of their earnings for future growth. That future growth may or may not come to pass, and REITs should retain enough cash to stay in business, but generally it's therefore better to go with REITs that pay the higher dividends now (as long as they're paying it out of current earnings. If they're dipping into saved cash that's a bad sign.)

Growth Trap
Growth Trap

Latest issue of Barrons

2007-04-23T08:09:00.000-07:00

I bought BARRONS yesterday for the first time in ages. It's good to see that Alan Abelson is still going strong, making sarcastic comments in relation to Richard Gere getting burned in effigy for kissing an Indian Bollywood film actress (seems to me that somebody who's so public with his conversion to Buddhism should know better than to kiss an Indian woman in public) and predicting disaster for the stock market even as this issue is predicting the Dow at 13000 soon (probably this week). Plus, there was a column about problems at Fidelity Mutual Funds, which apparently are not delivering the performance they used to do (I'm not a fan of open ended mutual funds) so they're investing more money into research, which is probably useless, and why I'd rather go with Vanguard if I were to put money into an open ended mutual fund -- fewer expenses. They run an annual stock picking contest for students and professors and described this year's winners, though I forget whether they used leverage to make their stock picks, but they were allowed to sell short. And one guy had a big winner by buying a subprime lender than was down way below its book value.

leveraging Barrons
leveraging Barrons

How much time to research investing?

2007-04-22T16:10:00.000-07:00

Another way, rarely talked about directly, in which time and investing interact, is simply how much time investors put into their investing.

A large number of the investing books I've read advise readers to continue their education, to stay up on the state of the national and world economy, the leading indicators, to keep reading more and more books on investing, to frequent online investing forums, to read the blogs, the sites and on and on.

If you had the time, you could make learning about investing and the current state of the markets a fulltime job. Heck, it could occupy you 24/7.

If you spare all your time reading annual reports, yet another book about Japanese candlesticks technical analysis and on and on, will you make more money than someone who simply sends a portion of every paycheck into an S & P 500 index fund?

Chances are, you'll make less, because you might feel obligated to actually act on some of the information you're reading, and that will reduce your investing total yield.

And even if you get a little return, long-term, I have to step back and apply a tool of economics -- opportunity cost.

Maybe you would make even more money if you took all that time and energy and money (books and software cost money) you're spending on your investment research, and applied it to a part time business you'd make even more money. Or even if you just worked a part time job instead, you'd probably make more money, which you could then also throw into that S&P 500 Index fund and so make even more money.

investing research
investing research

How much time to invest?

2007-04-19T10:55:00.000-07:00

How much time do you have to invest?

That's a very important question for two reasons.

First, because the more time you have, the more you can and should let your earnings compound -- which will give you more money in the long run.

Secondly, because you may have either a lot more or a lot less time than you think, and how you perceive time is more important than actual time.

Here's what I mean -- Based on the first rule, it's obvious that young people should be investing as much money as they can. They have the most actual time to invest.

But most young people don't reach that conclusion. They perceive that because they have a long time before retirement, they can wait to save. I've tried to point out to young people in their 20s what I wish I'd known -- and they just argue with me about how they don't have enough money to save. But they have enough money to buy beer. That immediate sensation is more important to them the long term benefit of investing now.

I know that when they're my age, they're going to look back and be sorry, but they don't perceive that now.

Also, most older people have more time than they usually think. Life expectancies are increasing, and so about 1% of people aged 65 will live to 100. That's 35 years they have. True, 99% will not reach that, but how many know whether they'll be in the 1%. What if they spend all their money before they die?

Also, as medical science advances, life expectancies will continue to increase. Thirty-five years from now, living to 100 may not be exceptional at all. The longer you live, the longer you probably will live.

So most older people think they have less time than they actually do.

Of course, unfortunately, some of us will die a lot younger than we expect or plan for. But that can't be known or predicted, so we should plan for a long life.

This is all important when deciding what to invest in, because all investments are a trade-off between more money now and more money in the future.

investing lengths
investing lengths

Investing risk of debt and inflation

2007-04-18T13:11:00.000-07:00

Are we going to have a replay of 1970s-style stagflation? Advisor Stephen Leeb thinks so, according to a recent email I got from him.

For those of you who don't remember, during much of the 1970s the econony did something it's not supposed to -- it had high inflation and high unemployment at the same time. The stock market basically went nowhere. Commodities and real estate greatly rose in price. The whole "get rich quick in real estate" concept began during that period. All but the youngest real estate gurus got their start during that decade.

But personally I think the investing risk of stagflation is low. A lot of those problems are traceable back to the coming of age of the baby boomers. A whole lot of 20 somethings looking for work. That created the high unemployment rate.

I am not going to argue with Mr. Leeb, however, that inflation remains a threat. The decline of the dollar and the rise in the price of oil are both problems for American residents.

Also, I highly agree that there's way too much debt for the good of the American and world economy. Federal government debt could be lower, but business and personal debt is a lot higher.

In case you're wondering, Mr. Leeb believes that the market is going up in the short run. He says the smart money, including Warren Buffett, is buying.

Of course, it's always smart to buy good companies with a long record of paying dividends.

investing risk
investing risk

Currency diversification

2007-04-17T10:00:00.000-07:00

I think one of the most difficult aspects of the current monetary system and economics -- and how it affects investing -- is the relativity of the value of currency in relation to other currencies.

You can make 5% on your US dollar investment but still losing spending power because the yen goes up against the US dollar.

In the past, this has not been particularly important for US residents getting a US dollar income. Everything we bought was priced in dollars. We might notice Toyota prices going up and down, but overall, it didn't make any difference unless and until you travelled overseas.

Yet as the world's economies adapt and change, we will all be affected by the relative strength of our own national (or multi-national, in the case of the euro) currencies.

Therefore, everybody should have some source of income from other currencies, and therefore should consider making good investments outside their own country.

Some people in the US advise simply investing in major US corporations that do a lot of business around the globe (Coke is the most recognized brand name in the world. They even have a flair for designing how the name looks in other alphabets -- the Coke logo in Thai looks more impressive than the English version.) And this makes a lot of sense.

However, I favor diversifying your investments in different currencies -- NOT trying to make money from trading the foreign exchange markets (that's madness for a normal person), but simply from hedging your sources of investment income. At a minimum, try to have some Japanese yen, US dollars and euros. Also, British pounds, Australian and Canadian dollars.

foreign exchange investing
foreign exchange investing

Investing in consumer (bad health) companies

2007-04-16T10:21:00.001-07:00

Yesterday's post made me think about how the same principle holds true for many of the companies that are high, dependable dividend payers, which is the kind I'm interested in, since I don't want to put my money in fixed investments that are eroded by inflation.

Many of the good dividend payers are companies that sell low-cost consumables -- especially snack food. Hershey, Wrigley, McDonalds and so on. Or Philip Morris (now Altria) which sell cigarettes, which is the ultimate bad health type of consumer stock. When I buy those companies am I responsible for the poor health of the people who eat too many of their products? I don't think so -- even of tobacco companies, as politically incorrect as it is to say so. I've never been a smoker, don't want to be a smoker, hate tobacco smoke, don't like to be around it, and I'm glad for reasonable restrictions on it inside public buildings -- though I've come to hate the fascist reminders in airports about not smoking.

Yet nobody forces anybody to go to McDonalds, eat a chocolate bar or even to smoke a cigarette. When I was a teenager I chose not to smoke, and I've kept up that choice through my adult years. And the information about the health problems associated with smoking have only increased since I was a teenager. So anybody who's a smoking teenager or young adult now is smoking despite 100 times more knowledge of its negative health effects than I had.

So why not buy the stocks of these companies and collect the dividends?

consumer investing
consumer investing

Drugs and drug stocks

2007-04-15T15:51:00.000-07:00

Invest in drug stocks but avoid their products -- you'll be wealthier and healthier.

I can understand how people get into social investing, though I haven't since my days as a radical. As someone who's long been interested in natural health, vitamins and so on, I feel a conflict when it comes to investing in drug stocks.

Oh, it's not like I believe companies such as Merck are frauds such as the infamous prime bank scam -- I just think that in a perfect world, we'd all be in better health if we first of all took good nutrition, herbs and other supplements. Plus exercised and did other things that enhance good health.

It's not just a matter of avoiding the need for drugs by staying healthy (although that's important), it's that I believe that most prescription drugs are downright unhealthy -- or, at the very least, an unpleasant trade off between benefit and risk, which is probably unnecessary if the patient would take the right nutrition or get the right exercise.

Yet there's no doubt that drug companies are good investments. As baby boomers grow olders, they're going to take a lot more prescription drugs (I'll stay away from jokes about non-prescription drugs).

investing in drug stocks
investing in drug stocks

International investing + global warming

2007-04-14T13:23:00.000-07:00

How will global warming affect income investing?

I'd rather write -- how will the global warming controversy affect income investing?

I don't know whether the planet is getting any warmer or not. After all, local weather varies tremendously for a huge variety of reasons. We now have ways of collecting data from around the world, satellites, etc which we didn't have until recently. When we compare current temperatures to past records, we're not making a fair comparison.

And if it the planet is warming, is human activity the cause? Long before the industrial revolution began, the world was hotter . . . and colder. The amount of light and heat the sun radiates can vary by up to 30%, yet I rarely hear this mentioned, and I've heard that the recent UN study on global warming did not even include that in its model.

If the planet is warming, no matter what the cause, what can we do about it? I'm against proposed solutions that would give government control over people, yet authitarian socialism seems to be the goal of many environmental activists. I believe that if there is a real problem, we need to use our ingenuity and technology to solve it, without condemning the masses of people of the Earth to poverty.

I do think that the issue makes international investing even more important. You can't afford to keep all of your money tied up with the political and economic fortunes of any one country, even the United States.

It appears that there will be a lot of economic activity related to global warming. And I can't really be against the reduction of fossil fuel emissions. Burning fossil fuels is wasteful of fossil fuels. Plus it creates some pollution, which I'm happy to reduce.

So hopefully the controversy will encourage the development of alternative energy sources and ways of cleaning up pollution . . . without discouraging the continued wealth creation of global capitalism.

global warming pollution
global warming pollution

How low can stocks go?

2007-04-13T08:02:00.000-07:00

Is there a floor on the stock market and, if so, where is it?

A lot of times when you read about individual stocks and the stock market, the writer or commentator talks about price rises as though they're permanent.

"If you didn't buy XYZ at $20, you've lost out on its rise to $50." Maybe. Or maybe it will go to $10 by next year. Or $1.

People commenting on Alan Abelson of BARRON'S often sound like that, because he's a chronic bear. "He would have had us miss all market gains since the Dow was 3200," one woman wrote in. In their book RULE BREAKERS, RULE MAKERS, The Motley Fool also go after Abelson.

Now in 2007 we can see perhaps some truth on both sides. The late 1990s were an unsustainable boom which did bust. Starting in March 2000, The price of many dot.com stocks plummetted from hundreds of dollars to pennies. High tech companies that made a profit, such as Microsoft, saw their share prices dramatically reduced. The overall market went down, although not by as much.

However, bad as the early 2000s bear market was, it wasn't as bad as some of Abelson's predictions. People who bought stocks at a price below their bear market lows, remained "in profit" -- at least without adjusting for inflation.

Is that a guarantee that the market or individual stocks will never go below the early 2000s bear market lows?

No. The Dow is now about 12,500. Maybe it will go back 777 where it was in 1982. Maybe below that, wiping out all price gains made in this long term bull market.

Maybe it will never go below 12,500 again.

Nobody knows.

And that's my point. It's easy to point to stock charts from the past, compare them with today's prices and then draw conclusions. But nobody knows where those prices are going tomorrow or in the next 5 or 10 or 30 years.

It's not likely the Dow will ever go back to 777 -- but I wouldn't risk my life on it, especially not with terrorism, looming conflict with China, and such threats. The U.S. has survived past threats -- that's no guarantee of the future.

Advocates of "value investing" often speak of how stocks can be undervalued now but the market will reward good companies in the "long run." I've got news for you -- there is no "long run." Stock prices are ALWAYS fluctuating.

Many companies traded on the New York Stock Exchange are more than 30 years old. Their prices continue to fluctuate based on the market's current appraisal of their value. 30 years from now, the stock prices of all then-existing companies will also fluctuate based on the market's then-current appraisal of their value.

And those 30 years from now prices could be considered "over" or "under" valued at the time, depending on how you choose to value a stock.

And those 30 years from now prices could be higher but also lower than today's closing price -- without or without adjusting for inflation (which is important, but it's easy to forget about this when oohing and ahhing about how much a stock has gone up over the years.)

stock price lows
stock price lows

Is inflation under control? Does anybody know?

2007-04-12T09:56:00.001-07:00

The #3 Deadly Lies About Money from the ad in Rude Awakening (I mentioned it about a week ago) is "Inflation is under control."

According to that, the "official" inflation rate is 3.8%. If that is true, the value of a U.S. dollar will be cut in half in just 19 years. If you're retiring now at age 65, the value of your savings will be diminished by half, before you're 85. And although that may sound very old and distant, large numbers of people are living to, and beyond, that age.

If you're just starting your work career, 19 years is less than half of the time you'll work before retiring.

It's a favorite theme of investment newsletter salesletters that the official inflation rate is understated by the government. I don't know, not having access to all their information.

And I doubt the real accuracy of the government's information. I remember once when I was still in college. The U.S. dollar was worth more than twice what it is now (though I didn't have nearly as many of them), but inflation was much higher than it is now.

I was working part time at Pizza John's (NOT "Papa" John's!), a local pizza restaurant. After a lunch hour rush, a young woman working for the government came in to ask about price increases to keep track of inflation.

She was young and nice looking so my boss enjoyed talking to her for a few minutes, flirting with her, but when she kept asking him about when it was that they'd last increased prices and whether a potato slice always went with a certain sandwich, I could see him getting bored and impatient, and he just put her off with whatever he felt like saying.

So I'm not convinced the government actually knows what the "true" rate of inflation is.

However, it is the greatest single financial enemy of anyone who's not actively increasing their income.

inflation
inflation

Prepare for retirement before it's too late

2007-04-11T13:08:00.000-07:00

The #2 Deadly Lies About Money from the ad in Rude Awakening (I mentioned it about a week ago) is "Your retirement is safe." Well, Bernard Bernake new Chairman of the Federal Reserve is trying to sound the alarm, but no politicians are listening. To be fair, President Bush tried to implement reform of Social Security early in 2005 but he was blocked by the expected opposition from the Democratic and pseudo-Republican liberals who refuse to touch the sacred cow of Social Security.

Yet anybody who looks can see the problem coming. There's not going to be enough money in the Social Security trust funds for the baby boomers. Not enough money to pay for Medicare expenses. Not enough pension money in the pension funds.

Even worse, there's just plain not enough money in the world!

And Japan and many European countries have an even worse discrepancy than the USA!

Sooner or later, we're going to see a massive theft of Social Security from the "rich." I say "theft," because Social Security was originally sold the American people and promoted as "insurance," not welfare. The taxation of Social Security for people with incomes over $25,000 which began about 10 years ago was an outrageous violation of this principle which nobody objected to, because hey, who cares if the "rich" (elderly people who make over $25,000 annually) don't like it -- why should they get it if they don't need it? Because they paid for it, that's why.

Just lately the government instituted the Income Related Monthly Adjustment Amount (IRMAA) part of the Medicare Modernization Act of 2003 - which forces elderly people who have over $80,000 in income to pay more of a Medicare Part B premium than other people. Again, class warfare.

And class warfare rhetoric is just beginning. We can expect to see higher Social Security taxes, an increase in the retirement age and more means testing (though it may just be backend taxation) of Social Security benefits.

If you save and invest money, even if it's just in certificates of deposit, you're going to be punished, to pay for the people who didn't save anything. Also watch out for a crackdown on people who have money in bank accounts in other countries. The government will want to get its hands on your money no matter where in the world it is.

baby boomer investing
baby boomer investing

HYIP and other investing scams

2007-04-10T08:01:00.000-07:00

I hope this doesn't apply to any readers of this blog, but last night I was rereading James Glassman's book THE SECRET CODE OF THE SUPERIOR INVESTOR, and I reflected about his characterization of investors as either outsmarters or partakers. I have certainly been an outsmarter for most of my investing "career," (except for contributing to my retirement fund at work), and I've paid the price.

Outsmarters don't win with the possible exception of when they have enough control to manipulate the results, which could be illegal and certainly is unethical. This may apply in some limited circumstances, but not to the vast majority of us.

At its most extreme, the outsmarter mentality is so out of touch with reality that it makes people susceptible to fraud. If you're going to listen to stock tips on cable TV, why not listen to them from boiler room telephone con artists? If you're going to put your money into overseas hedge funds then why not fall for some other fancy investment in the Virgin Islands.

If you think you really understand how the markets work in the short term, why not day trade? If you think someone else really understands how the markets work, why not send them your money to help you get rich, even if they don't give you any details, as few HYIP scams even try to do?

It's a truism that con artists claim that their cons work only on greedy people who think they can get something for nothing.

I don't know if con artists really claim that, but it does seem to apply. I remember that when I delivered pizza the people who wanted to cash bad checks for more than the cost of the pizza would add a large amount of money to the total as my tip, so I'd accept the check. And the infamous online Nigerian scam certainly also relies on the greed of its victims.

So the same "outsmarting" mentality that leads people to lose money through stock tips, paying brokerage commissions through trading, paying high mutual fund fees, paying even high hedge funds fees, paying interest on the leverage of buying stocks on margin . . . can lead to becoming the victim of out and out scams and frauds.

HYIP and other scams
HYIP and other scams

The Bond Desk by Neil George

2007-04-08T19:50:00.001-07:00

My quest for information on fixed income investments such as bonds led to this report by Neil George. It's selling his newsletter on bonds, which is expensive, so I'm not pushing anybody to subscribe. I wouldn't get anything out of it if you did, and I myself haven't either, but I am curious. What kind of bonds are currently yielding 17%? How much risk is involved? I do appreciate his early words about how wealthy investors don't want their money sitting in mutual funds wasting time -- they want to get paid. That's the whole theme of this blog and my site, getting paid now. It's encouraging to know that the ultra-wealthy share this attitude :)

The Bond Desk report

bonds
bonds

$300 million investment in old economy biz

2007-04-06T11:03:00.000-07:00

Here's an interesting investing question -- would you risk $300 million of your own money to buy an "old economy" stock with a business that's going downhill thanks to the Internet?

That's what Sam Zell, a real estate mogul, did recently by buying the Tribune Company, owner of the LA Times.

At what point are troubled companies a true "value" investment and when are they low-priced for good reason?

Newspapers are losing readership and advertising dollars to the Internet. This is due to a number of factors -- online news sources are more up to date and convenient. People's demand for local news isn't really great enough to justify an extensive staff of reporters for local news, and they can't afford to send reporters all over the world as in the old days.

I believe that's it's also partly because major newspapers in this countries are secretly aiming to destroy this country, and many intelligent people realize that they're anti-American, though few realize how consciously many newspaper editors and reporters are actively working to bring down freedom and capitalism.

But that's also true of TV journalism, which is not so much on the decline, though I think eventually it will go down the tubes. CNN and Fox will supply all national and international news and the local news teams will cover fires, car crashes and mayor news conferences.

Yet many businesses have been on the decline for years, but still manage to make money, such as railroads. Maybe Zell has a plan to revolutionize the newspaper industry as Nucor did for steel at a time when every other U.S. steel company was losing to competition in Germany, Japan and South Korea.

It can be better to pay a low price for a declining but still viable business than a high price for an expanding business.

declining industry investing
declining industry investing

Was Enron truly ever viable?

2007-04-05T08:22:00.001-07:00

as Enron ever a viable, long term company? I'm thinking about that because I just read a history of the company from its beginnings as a merger between two oil pipeline companies through the bankruptcy.

At one point early in its history, Enron's top executives decided to make it a modern company, and it expanded enormously. Not just in supplying energy, but in trading it the way Wall Street firms trade options. They even hired some traders from a major bank to come and teach their people how to make trades.

Within a few years, Enron was trading electricity, natural gas, the weather, paper pulp, metals -- almost anything except the sheer paper assets or ordinary exchange-traded commodities which are what we normally think of as "trading." They were making markets in these things, plus financing projects.

The author describes Enron in the nineties as certainly being a very innovative company. They were enormously selective in who they hired, picking only the brightest and most ambitious, and fostered a culture of entrepreneurialism. If you worked for Enron, you had wide freedom to think up your own project and then network among others for support, both financial and material. If you could get the project going, it was yours. If you succeeded you were a hero. If not, try again. The ability to make mistakes and learn from them is attractive. Though it's doubtful that the company as a whole did learn from mistakes, since people came and went so much.

Can a corporation continue indefinitely going hither and thither without any overall purpose or control? There were a few years Enron felt it could trade and profit from any market at all. This also helped lead to losses. Yet they did not enforce trade size limits on their traders, so unless they found truly inefficient markets to trade, there was always substantial risk of overtrading. Always traders to commit you to positions too large is NOT "managing" risk. (Just ask Barings Banks - a hundreds years British institution that allowed one trader in Hong Kong to drive it out of business.)

What lead to their ultimate downfall was applying that mindset of financial manipulations to their own accounting and financial systems. So they "managed" their ever-growing debt as they "managed" risk -- and ultimately couldn't sustain it.

What if a well-managed company positioned to exploit market inefficiencies in energy and with sufficient internal controls and honest, conservative accounting and a long-range vision everybody understands and follows . . . in short, what Enron lacked . . . could they make the same business work?

I don't know, but as an investor I much prefer an "old economy" type of company that sells a well-established and in-demand product or service for a profit. Although I don't think the efficient market hypothesis applies to closed markets such as electricity, I always question the ability of traders to beat the market on a sustained, long term basis.

I suspect that supplying people and businesses with needed and desired goods and services is a better business model.

Enron viability
Enron viability

Dividend paying stocks more dependable than "earnings"

2007-04-04T11:25:00.000-07:00

I got an email today from Schaeffer Research, which is basically Bernard Schaeffer who publishes The Options Advisor, his entry-level option newsletter product, predicting that there're going to be a lot of disappointing earnings announcements in the weeks to come, now that the first quarter has closed out and companies will be providing their net earnings for the first quarter.

And of course he says this will mean a lot of profit opportunity -- he foresees a lot of volatility.

Yet the thrust of the email is bullish, so apparently he think that companies will post earnings that are actually higher than investors expect. So even if they're lower than the last 3 years, they'll be higher than expected, and that means a lot to a lot of traders.

Of course, earnings always go up and down. Plus, earnings is an accounting figure subject to accounting manipulation. Cash flow is a more dependable indicator in many instances, because it can't be manipulated. Either there's money in the bank account or not. The bank doesn't care about appreciation or off the books limited partnerships.

And the best way to evaluate cash flow is to find the companies that continue to increase dividends year after year -- they are more dependable than quarterly earnings statements.

Schaeffer's tracks a put/call ratio, and that's the highest it's been in over 3 years. So stock prices may well go higher, if he's right.

But remember that you can spend dividends and still keep the stocks.

dividend increases
dividend increases

Motley Fool on Alan Abelson

2007-04-03T07:42:00.000-07:00

I recently read the book RULE BREAKERS, RULE MAKERS by The Motley Fool, and one part of it I found pretty funny but didn't include in the review I wrote for Ezine Articles is that the Gardners made fun of the editor of BARRON'S, Alan Abelson, for her persistent bearishness. I was reading BARRON'S around that time (the book was written in mid-1998), so I know exactly what they're talking about.

I will put in a disclaimer now that I don't know what the Fool now say about the late 1990s boom. This book is an example of it, since they tout high tech stocks and also say that they ignore Price/Earnings or P/E ratios. I will say that it may be unfair to judge their current advice by what they wrote during the dotcom boom. They were caught up in it, and so were many other people.

Alan Abelson of BARRON'S was never caught up in the dot com boom. He was predicting stock market disaster years before the boom officially began. I don't know what he wrote about the bust of 2001, or what he says about the market now that it's gone past the boom's peak.

But it's also true that if you'd invested according to Abelson instead of The Fool you'd have missed out on the dot com boom -- and also kept your money through the subsequent bust.

To be fair, if you'd bought the company that pays dividends that they recommend -- Coca-Cola -- you'd have been paid a lot of nice quarterly checks. It's their enthusiasm for some high tech stocks that looks like part of the boom mentality now, with the benefit of 2007 hindsight.

Motley Fool on Abelson
Motley Fool on Abelson

Investing lesson from Uncle Scrooge McDuck

2007-04-02T08:32:00.001-07:00

When investing it's important to keep in mind what about economic activity is real and what is important only if and when it is connected to what's real.

I know that's vague. I'll illustrate with an example of a comic book story I read when I was a little kid.

If you're a comic book fan who knows more than superhero comics, you should know that in the 1950s and 1960s a man named Carl Barks wrote and drew the Donald Duck comic books. Since Disney didn't give credit to its artists, nobody at the time knew his name -- that came out later -- but he was widely known as the "good" artist. His style of drawing is distinctive for its detail and authority. Plus, he wrote a lot of fun and terrific stories -- sending Donald, Uncle Scrooge and Huey, Dewey and Louie to have adventures all over the world.

Anyway, in one story everybody in the world is given a million dollars or some kind of unlimited amount of money (I forget the details).

So everybody in the world decides that since they're rich, they don't have to work anymore. They start taking it easy.

Of course, Donald and his three nephews start to do the same, so they're shocked when Uncle Scrooge McDuck (I wonder if some Scottish civil rights groups would object to Disney giving him a Scottish name, if these comics were to come out today?) makes them start growing food!

They don't understand why their rich uncle says there's going to be a lot of trouble in the world!

Of course, once the world's supply of food and other goods get used up, people start to go hungry. They find that all the money they have is useless when there is no food to be bought.

Of course, the ducks are just fine, since they listened to Uncle Scrooge and worked hard to raise their food.

So Carl Barks through this comic book story gave me an important economics lesson. Money is important, but only when there's food available to buy with it. Somebody has to grow it, harvest it, and distribute it to stores. Or people don't eat.

So this connects with investing -- you make money from giving people what they need and want. All the money in the world won't help you if you can't do that.

Scrooge McDuck investing
Scrooge McDuck investing

7 Deadly Money Lies

2007-04-01T10:21:00.001-07:00

As a subscriber to Agora's free ezine, The Rude Awakening, I also get tons of email sales letters for their financial newsletters.

I often enjoy reading these for various reasons. If they're well-researched, they can be quite informative, and give you a lot to think about. I got one recently called the The 7 Deadly Money Lies. You can start to read it here:

7 Deadly Money Lies

Agora mostly takes a hard-money, pro-gold, pro-commodities especially oil, the world is going to hell approach. I've been hearing such arguments since the 1970s when libertarian Harry Browne and some others started popularizing them. They've been right in some ways -- inflation certain has eroded the value of the dollar -- but obviously wrong in others -- the world's economy has not collapsed -- yet.

Maybe it will tomorrow.

Maybe you should just seek the safety of passbook savings accounts although that concept is anathema to both sides.

My own opinion? #1 -- yes, deficits do matter. I don't know if Dick Cheney really believes they don't. But Republicans have been griping about Democratic spending deficits for years, and should continue to try to balance the budget even though we must also fight the war on terror. Because the consequences of losing that would be far greater than the economic problems brought on my the budget deficit.

money lies
money lies

Risk of inflation

2007-03-31T12:43:00.000-07:00

Nobody with any sense denies that the greatest risk of fixed income investing in inflation. A lot of people are forgetting how insidious inflation is, and don't consider the current low levels (from 2 to 4%) dangerous.

Basically, general macroeconomic inflation is a general raising of the prices throughout the economy. Simply, there's a relative rise in the amount of cash going through the economy compared to the amount of goods and services available for sale in that economy.

My macroeconomics teacher in college used to like to tell us that if we wanted to reduce inflation we should burn money. It was such a shocking thing to say about money (and nobody, including him, volunteered their personal money for this stop-inflation project), that we didn't get that it was one of those jokes that was funny because true.

If you have two apples for sale and two dollars -- each apples costs a dollar. Print two more dollars so you have a total of four -- but the number of applies remains the same -- and the price of apples will go up to two dollars each.

A simplified example like that makes it clear. Our real-world economy is much larger and more complex but operates the same.

We can't eliminate inflation because there's a general call for the government to keep on creating money by spending it. Congress votes to spend some money et voila! checks are issued and then cashed and a welfare mother is paying her rent to her landlord or a defense contractor is paying its suppliers.

Some of this comes from the tax money taken from us taxpayers, of course, but when Congress authorizes more money than is already in the Treasury Department collected from taxpayers, then bonds are issued to raise the money, and the American budget deficit keeps on growing.

But people who receive the money directly (welfare recipients and defense contractors) or indirectly (landlords or raw materials suppliers) like having that cash flowing into the economy.

Retired people who are receiving only Social Security and pensions and interest on bonds are not so happy to see the price of bread go up the next time they visit the supermarket.

inflation
inflation

Is entertainment including gambling really of value?

2007-03-30T08:11:00.000-07:00

One of the investment ezines I subscribe to is the The Rude Awakening from William Bonner of Agora, and the other day it published an interesting article contrasting an oil refinery with a casino, and drew implications that clearly condemned the modern American economy, for building casinos but not refineries.

It mentioned that casinos do not create wealth, only transfer it from the customers to the shareholders of Harrah's while providing a little entertainment value.

Yes, this is certainly true, and it's true that refineries do add value to the economy by turned crude oil into usable gasoline and other petroleum byproducts, and that our economy is weaker because we don't have enough refining capacity.

I also agree that most gambling is stupid (some forms which also require skill, especially poker, are winnable if you're good enough).

But if spending money on entertainment is bad, the whole world is going down to the tubes and also has. It's true that the developed world spends huge amounts of money on "entertainment" (all nonessential activities), but so does the developing world.

Spectator sports, cigarettes, alcohol, snack foods, movies, music, novels, games of all kinds . . . people in the developed world spend large amounts of money on these things also. Perhaps, in proportion to their total wealth, more than people in the developed world.

I think that there's a valid argument that all this economic activity simply transfers wealth from customers to producers. Yes, much of it creates something permanent (movies, for example), but still there's no utilitarian value to a good movie. It's valuable only for the experience of the people who enjoy watching it.

And this includes gambling. People all over the world play cards, bet on lotteries, go to casinos etc. Americans having many gambling options besides going to Las Vegas, that's new. Internet gambling is new. But gambling itself is not new at all.

As far the American economy . . . I don't know the figures, but I'd bet that our trade deficit would be a lot higher if we didn't export Hollywood movies, professional sports, pop music, and junk food (Coke is the best known brand in the world). It's probably not significant compared to the world economy as a whole, but lots of people from all over the world go to Las Vegas to see the sights and to lose money gambling, including our greatest economy rivals, the Chinese and Japanese.

Time to invest in oil?

2007-03-29T10:09:00.000-07:00

As I write, some people are upset about Iran taking 15 British sailors hostage. One person who is outspoken is Tony Blair, Prime Minister of Great Britain, and he has been making veiled threats. Naturally, this entire situation is making the price of oil go up.

I believe that the only reason we don't just blow the shit out of Iran's military, and their oil infrastructure is of course our dependence on that oil. Iran has the capability of shutting down oil transportation from the entire Persian Gulf, and probably would do so if attacked.

So is this time to join the commodity bulls and buy up oil stocks? I'm sure not going to say such stocks aren't going up. There's little doubt that prices at the gas pumps are going to go up due to this crisis -- quite possiblly a lot.

A local radio show morning host likes to repeat that this increases Iran's income, so that's why they like to provoke us by creating these crises.

Yet the more oil prices increase, the greater the incentive for alternative fuels.

So I still advise people to invest in chewing gum, electricity and real estate.

oil crisis
oil crisis

Mergent to bring out bond indexes

2007-03-28T04:42:00.000-07:00

Here's good news for fixed income investors. Mergent, formerly known as Moody's, and Ryan ALM have teamed up to produce benchmark indexes of bonds.

Mergent already provides a great service to dividend investors through keeping its index of Mergent Dividend Achievers -- those are companies that have increased their dividends every year. The Dividend Achievers index forms the basis for a number of exchange traded funds, making it easy for income investors to buy a large number of companies that have consecutively raised their dividends (for U.S. companies, at least 10 years in a row). It also has version of Canadian and companies from other parts of the world which have raised their dividends at least 5 years in a row.

The press release did not give any details about what the bond indexes will focus on. Obviously, bonds don't raise their interest payments every year (don't we wish!), so they must be considering some other measure of quality.

You can learn more at:

Mergent and Ryah ALM bond index partnership

Mergent bond indexes
Mergent bond indexes

Define investing success

2007-03-27T15:16:00.000-07:00

One common -- make that, "near universal" -- mistake people make with investments is to clearly define what they mean by "making money."

See, there're hundreds of investment techniques and methods of various kinds, and things to invest your money in. And they all "make money." Even HYIP scams make money for somebody -- everything can and sometimes does make money in the short term.

After all, any given investment can only go up or down. Sometimes they're essentially sideways, but sooner or later they choose one direction or the other.

So the odds are you can make money whether you choose investments for value, technical analysis, tea leaves, Gann squares, the Elliott Wave, astrology, Nostradamus, Edgar Cayce, growth, momentum, a gypsy medium, a crystal ball, dream analysis or any other nonsense. It also explains why so many investment newsletters stay in business. Some of their picks are winners and some readers put their money on those picks and are happy. So you should be careful about evaluating the records of anybody trying to sell you their stock picks or stock picking system or software.

But the real question is how much money, for how long, and for people actively buying and selling, how much of your gains is lost through transaction costs and paying capital gains taxes to the government.

That's why most people would be far better off to just put all their money into an S&P 500 index fund.

And in my opinion most people would be far better just putting all their money into investments that pay dividends or interest and holding on to them.

define investing success
define investing success

What goes up, comes down, and goes up and down again

2007-03-26T07:49:00.000-07:00

The market had a terrific week last week. Now, of course, the question on everybody's mind is, will it keep going up this week.

Is that on your mind? I hope now. You have better things to do. Your job. Your business. Have fun with friends and family. Continue your education. Exercise. Watch a good movie.

Is this heresy? To some people, yes. I advocate that you just not care much what the market does unless it plunges so far that the overall economy is affected a la 1929. If it causes another Great Depression, then of course you should be concerned.

But these daily/weekly/monthly ups and downs just aren't worth the effort people put into tracking them. Even day traders. Last week the market went up big time, but I'm sure that most day traders lost money. And when it goes down, some day traders make money. What matters to all short term traders is how well they guess (or, to be nice, predict) the trends of the stocks or market they trade.

For you and me, we should just be buying up income-producing assets and focus the rest of our minds on living our lives. This of course should include doing well on our jobs, in our careers and in our businesses to increase our incomes so we have more money to invest.

But it doesn't include caring about the short term noise of the market. It goes up, it goes down. Care about your dividend and interest checks.

stock market noise
stock market noise

John Bogle interview

2007-03-25T17:33:00.000-07:00

John Bogle started up the Vanguard family of mutual funds, known for their industry-shaking low expenses. I use that adjective "industry-shaking" for good reason -- most mutual fund companies want grab as much of your money as they can get away with. Bogle pioneered funds that take as little as possible, making their profits from volume.

Bogle understands that your longterm investment results are directly related to the price you pay, and keep paying in the form of expenses -- both front-end and back-end loads and annual management expenses. So he kept those down as much as possible. All investors owe him a debt of gratitude, because probably expenses at all mutual fund families are lower than they'd be if he hadn't founded Vanguard.

Bogle also made it easy for investors to simply buy the overall U.S. stock market through Vanguard's pioneering S&P 500 index fund.

This article focuses on Bogle's predictions for the stock market, and doesn't even mention the risks of investing in bonds, but he expects poor overall returns.

In my estimation, all the more reason to invest for income, because there's not going to be large returns from capital gains. The article mentions international diversification at the end, since Bogle apparently shares the general pessimism regarding the U.S. dollar's prospects. However, he doesn't even mention the greatest risk facing the U.S. (and many European) stock markets -- the retirement of baby boomers. What will happen when baby boomers want to sell their stocks for a big profit? Who's going to keep on buying?

John Bogle
John Bogle

A balanced income portfolio

2007-03-24T11:22:00.000-07:00

One of the best known income investing "gurus" is Roger Conrad, who edits a free ezine UTILITY AND INCOME, as well as monthly newsletters UTILITY FORECASTER and CANADIAN EDGE, which is about Canadian Royalty Trusts.

So I was interested in his answer at a recent conference about how to have a balanced income portfolio. He favored income investors being in at least 7 or 8 different sectors:

1. Royalty trusts

2. Limited partnerships

3. Real Estate Investment Trusts (REITS)

4. Power and water utilities

5. Telecoms

6. Preferred stocks

7. Regional banks

8. Foreign utilities

9. Super oils (I'm assuming he meant stocks of big oil companies)

10. Selected bonds (with no details given, I'm not sure whether he includes Treasury Inflation Protected Securities

11. Convertibles in growth industries such as defense and mining.

An interesting list that I need to check out more. And he's not included some traditional high dividend payers such as companies with consumer brand names such as Altria and Coca-Cola. I have to wonder why not.

If you want to know more, check out his sites at: UTILITY FORECASTER and CANADIAN EDGE.

balanced income investing portfolio
balanced income investing portfolio

Subprime mortgages stories

2007-03-23T07:39:00.000-07:00

If you're at all invested in companies doing subprime mortgages then you should know there's a risk, and you're buying stocks that pay dividends based on consumer goods you shouldn't see any drop in income.

In all the hand-wringing about problems in the subprime mortgage market dragging down stocks in the U.S., I have to wonder what's happening with American Equity Mortgage Company.

This company was started here in St Louis years ago by Ray Vincent and his wife. The importance of their respective roles has been argued at length, but there's no doubt that a lot of consumer awareness of this company was generated by the numerous radio commercials ending with how Ray pronounced the company phone number "ninety-nine, ninety-nine" in a sort of twang.

Years passed, and American Equity Mortgage made a lot of money going after the subprime market through radio commercials, and the Vincents' marriage came apart and wound up in divorce court. That's when Ray's radio voice was silenced, as the couple argued over who should get the money and the company.

That's not to mention the many other interesting aspects to their arguments -- him getting drunk and breaking up furniture, being thrown out of a Vegas casino, custody of their dog, her hiring a security service and then sleeping with the head of the company . . .

But there was a lot of money to split up. Finally, not long ago, their divorce went through. I think Ray got a lot of money but his wife retained control of American Equity Mortgage.

Now Ray's back on the radio with more radio ads and another mortgage company going after the subprime market, and another phone number with the last 4 numbers "ninety-nine, ninety-nine," though I've heard that his ex-wife is suing him over that, claiming it's an American Equity Mortgage. He claims it's a number and she has no right to keep him from saying a particular number, which makes sense to me.

Who says high finance is boring?

subprime mortgage lending
subprime mortgage lending

How does mining gold create new wealth?

2007-03-22T07:23:00.001-07:00

Back in the late 1970s when predictions of economic doom and gloom were very popular, I read some of those books lauding the gold standard. In a lot of ways it makes sense to have money back up by some type of universal standard and store of value.

But I kept thinking -- if gold is true wealth, then the only way to create new wealth for the world was simply to mine gold. How did digging more of that yellow metal out of the ground add to the wealth of the world?

How does getting rid of that yellow metal destroy wealth? Does the world's supply of food or industrial capacity change if some gold is sunk to the bottom of the sea as when Spanish galleons were sunk by British ships during the 1700s?

There seems to be no comforting, solid yardstick for financial value. Everything is relative, including currencies. The value of the U.S. dollar can go up today against the Japanese yen but down against the euro. Tomorrow it may be the opposite. It's totally out of our control, but has very real consequences for businesses, consumers and travelers.

Yet as long as people are able to get their needs and desires met, the economy is functioning. And new products and innovations keep expanding our options and therefore our wealth. The real store of value is the "means of production" coupled with the ability to market what's produced to the end consumer. Consumer desires do change, so the challenge for businesses and investors is to keep up with that.

gold standard
gold standard

Company risk is often one person risk

2007-03-21T09:58:00.001-07:00

One of the competing theories of history is the conflict between the Great Man theory and Tolstoy's concept as explained in his novel WAR AND PEACE. The Great Man Theory, more popular here in the individualistic West, is that history, or at least much of it, is the result of the actions of individuals, whether for evil such as Hitler or for good such as Lincoln. Tolstoy maintained the opposite, that such leaders were simply the people who saw a parade and jumped in front of it. According to Tolstoy, tens of thousands of French men just decided to all of a sudden invade Russia, and Napoleon just called himself their commanding general.

However, large scale businesses seem to prove that the Great Man theory is the more correct. Did a whole bunch of computer programmers just all of a sudden decide to move to Redmond Washington, and Bill Gates just jumped in front of them and called himself the CEO of Microsoft? Or did Bill Gates first found Microsoft and then hire those programmers?

Obviously, the second explanation is more reasonable. And there's a clear implication that the fate (and therefore the stock price) of businesses are highly dependent upon one or a few individuals.

This is most obviously true of start up businesses which are usually the result of the vision of one person. Sam Walton and Bill Gates are two prominent examples, but almost every small company depends upon the vision and/or research and/or ideas of a founder or chief scientist.

This is probably more true even of large companies than we recognize. Where would General Electric be now if Jack Welch had never become CEO?

Yes, of course the work of a company is done by thousands or more of its employees, and the contributions of some other few individuals are very important. But it's also true that for maximum effectiveness their efforts must be directed and shaped toward a corporate goal.

McDonald's has good cashiers and bad cashiers, and always has, but its fate does not depend upon any one cashier, and never did. But certainly McDonalds would no longer be in business today if Ray Kroc had died a year after taking the business over. I wonder how many great businesses never got off the ground because their founders died prematurely.

So my point is that much of what is technically termed "company risk" is actually "important person" risk.

This seems to me a serious issue for people who think that they've found a company that's going to make them rich in a few years, whether the stock tip came from their broker, a buddy at work or an investment newsletter or the Internet.

Do you want your financial future to be just one fatal car crash, one heart attack, one untreatable case of pancreatic cancer, one bitter divorce, or mental breakdown away from disaster?

That's why it's important to diversify your investments. It'd be great to get in early on the next Wal-Mart, but none of those investors had a guarantee that Sam Walton would live as long as he did.

important person company risk
important person company risk

Stock tips on the morning radio

2007-03-20T07:28:00.000-07:00

This morning I was listening to the Allman and Smash in the Morning radio show on my way to work. That's a talk show generally oriented toward politics (on the conservative side), but they do go off in other directions, and Jamie Allman was talking this morning about how he fails to invest in companies he knows about.

Unfortunately, it was the kind of conversation that feeds people's belief that making money in the stock market is about making quick capital gains.

Jamie started off saying that he should have known to invest in Google at its Initial Public Offering or IPO because he went to some conference for investigative journalists about that time and all of them were using Google. Well, online Google itself was firmly established as the best search engine.

Then Jamie mentioned that way back in 1990 or 1991 he lived next door to a guy who told him once that his brother in Israel or some other Mideastern country was working for a company called Adobe, and Jamie should invest in that. Jamie blew his neighbor off, but now knows that Adobe is a great software company.

So Jamie was lamenting about his lost chances to make money, but added that he didn't lose money either. He just hadn't made any. I think a lot of tech stock investors would like to trade places with him.

Unfortunately, Smash didn't help point this out. He added that he bought MTV a long time ago, then years later sold it to be his house in Chesterfield (a wealthy suburb of the St Louis area).

Ah, if only it were so easy to get good stock tips. We'd all be rich and wouldn't have to work :)

Jamie, read AMERICAN SUCKER by David Denby (lost a million dollars in NASDAQ stocks) and A MATHEMATICIAN LOOKS AT THE STOCK MARKET by John Allen Paulos (lost large amounts on WorldCom) and be glad you haven't lost money.

stock tips
stock tips

Rule breakers -- certificates of deposit

2007-03-19T07:48:00.000-07:00

I haven't finished reading either book yet, but I've started on both a RULE BREAKERS, RULE MAKERS by Motley Fool and also a book on Enron. The first section of the Motley Fool book is on how to identify and profit from buying "rule breakers." Those are growth stocks that you can tell are just going to be giant successes (well 2 out of 3 times). Reading about how Enron in the early 90s transformed itself from a gas pipeline company to one actively engaged in numerous gas-based derivative contracts, I couldn't help but think that Enron was by Motley Fool's definition a "rule breaker." No other energy company was applying advanced financial strategies to the industry. And I wonder how you would have figured out in the early 1990s that Enron's growth would eventually fail. They were no doubt pioneers in their particular field. If they'd kept their accounting honest, I guess they'd still be in business.

I shouldn't pick on Motley Fool, who're not an investing icon, but I think I'd rather put my money into certificates of deposit than try to guess which young "growth" companies at any point in time are going to be the rule breakers which keep them growing quickly. They describe some in the book, but how easy is it to catch them prospectively instead of retrospectively? And how easy is it to distinguish the ones who're going to be successful from the "faker breakers?" Especially if you're not familiar with a particular industry?

certificates of deposit
certificates of deposit

Her dividend income grew bigtime

2007-03-18T12:20:00.000-07:00

For some reason, Anne Scheiber is on my mind today. Maybe because I'm thinking about retiring from my federal civil service job, and I'm older now than she was then.

You may have heard of her. Despite her graduate degree, she was repeatedly denied promotions, so she retired from the IRS in 1944 at the age of 51. She had saved up $5000 (even though her highest annual salary was $3150).

She spent the rest of her life living in a rent-controlled apartment in New York City on her civil service pension. She apparently spent very little money. She read THE WALL STREET JOURNAL every day at the library of a nearby woman's college, Yeshiva University.

When she retired, she took that $5000 savings and invested it in stocks. By the time she died -- 50 years later -- she had a portfolio worth $22 million. The dividends and interest she received annually amounted to over $800,000. She reinvested this money based on her research in THE WALL STREET JOURNAL.

She bought stocks because she noticed during her career with the IRS that rich people owned a lot of stocks. In later years she did move some money into bonds and such fixed income investments.

She got her revenge on the federal agency which refused to promote her. She never sold any of her investments. Therefore, she never paid any capital gains tax.

Also, when she died she donated the entire $22 million to Yeshiva University, no doubt to make sure they never stopped subscribing to THE WALL STREET JOURNAL so that other thrifty and eccentric multi-millionaires could read it.

She never benefited from the capital gains her investments earned, since she never sold her stocks. But she could have avoided paying capital gains taxes and still spent some money on herself thanks to the dividends her stocks kept paying her.

dividends
dividends

Penny stocks can be permanent options on market

2007-03-16T07:46:00.000-07:00

I see this site listed in almost every website directory I go to:

penny stocks

Of course, that doesn't mean I recommend penny stocks. If I want to gamble, I'd go to a local riverboat. Even if you don't live in an area close to legalized gambling, you'd probably be better off going to Vegas of Atlantic City for the weekend.

I have bought penny stocks, I confess. Years ago I bought some software designed to help people buy Vancouver mining stocks at their lows, when they're basically shells, and then wait until the promoters push them and raise the stock price. One of the companies I bought did have a price surge a few months later, but it wasn't enough for me to sell, and then it dropped back down. You can't tell if a stock is at its low even if it's only a few cents. They can go to tiny fractions of a cent!

A few years I decided to buy some of the small gold mining companies I saw used to advertise newsletter subscription. This time, my thinking was that these were like put options on the market as a whole. If the economy fell apart and gold shot up to $2000 an ounce, then these stocks would shoot up in price.

I still think that's a fairly reasonable strategy if you're worried about the price of the stock market or just the economy as a whole. Buy some small gold/oil other such stock that would benefit from commodity/energy price increases and general economic disaster. Then just hold it. If the economy keeps on going well, you paid for some cheap insurance that, unlike put options on the market, will never expire (unless the company goes out of business). If the economy does collapse, the price will go up and you can sell it to buy $10 a gallon gasoline.

However, the one natural resource company I've seen mentioned is BHB Billiton of (I believe) Australia. And it does pay dividends, since it's on the Mergent International Dividend Achievers list. Therefore, if you want to profit from price rises in gold, that would be a good option.

penny stocks
penny stocks

Investment basics -- human desires and needs

2007-03-15T10:17:00.000-07:00

Sometimes it's good to take a step back and think about the fundamentals. What is business? Fundamentally, business is people taking care of the needs and desires of other people. If we could all satisfy our own needs and desires, we wouldn't need to have businesses. We'd just do it everything for ourselves.

But even when we were cave people we weren't totally self-sufficient. No doubt some cave people were better at making bear skin coats than others, and perhaps traded their labor for extra food. No doubt save cave men were better hunters than others. But perhaps one guy was better at making spear tips.

There does have to be a reciprocity. I satisfy your desire for a terrific bear skin coat only if you satisfy my desire for two freshly killed rabbits to eat. This is how it works between free people. Of course there is slavery, both in the older form and in the modern form of welfare.

Money makes the reciprocity a lot easier. Instead of making a bear skin coat for two rabbits from you, half a deer from Joe, and a pile of eggs from Sue -- I simply charge everybody the same five dollars. This gives the system a lot more flexibility. You earns his five dollars from hunting, Joe from fishing, and Sue from carving necklaces.

All this sounds obvious, but it was a comfort to me when I came to understand that income from a company was safe as long as it met the needs or desires of many other people. As long as it does that, it will stay in business and general interest or dividend income for investors.

investment basics
investment basics

Subprime mortgages sinking stock market?

2007-03-14T07:45:00.000-07:00

More turmoil in the stock market. Just when it seemed it was safe to buy stocks for price increases again, after the late February drop caused by the drop of Chinese stocks on the Shanghai index, market pros are now upset over the situation of the American mortgage industry.

There's been so much money connected to mortgages that lenders have totally relaxed their standards -- borrowers were not even required to prove their income. I can't hardly imagine that - I remember the hoops I had to jump through when I bought my two houses. But interest rates have been so low this century that people have been able to buy far more house than they would have been able to before. Even if they're not able to keep up the payments.

So one of the biggest "sub-prime" lenders, New Century Financial, is on the verge of bankruptcy. Foreign markets in Asia and Europe have just tanked, because they're afraid Americans will no longer be able to buy up 95% of all consumers goods sold in the world.

Like all things, these excesses will worth themselves out, but it will be painful. Possibly very painful, according to some predictions. Of course, I've never advocated buying any mortgage or mortgage related securities. It is possible that some financial institutions that normally have been paying good dividends, such as Citigroup, will be burned by this. Citigroup apparently owned a lot of subprime mortgage risk.

REITs, which mainly collect rent, should not be as big a problem, except as the businesses they rent to are affected by any general economic slowdown.

stock market risks
stock market risks

What's real role of Federal Reserve Board?

2007-03-13T07:58:00.000-07:00

One big factor that affects the bond market is of course interest rates. No matter how high the credit ratings of a bond issuer, even if it's the United States government, its bonds' market value will go up if interest rates fall and down and if they rise. So depending upon the whim of the Chairman of the Federal Reserve is not one of the advantages of fixed income investing.

What did the economy do before the Federal Reserve was created to manipulate interest rates to affect the economy. Gosh, they went up and down based on the market demand for borrowing money. During booms periods, there must have a large demand for money, which automatically drove interest rates up. When interest rates got too high, then the demand had to drop . . . slowing down the ability of businesses to expand and be created, thus slowing down the boom.

Once the boom slowed down, demand for money slowed down, and so banks would have had to lower interest rates to make loans, and thus help stimulate the economy to get it out of the bust period.

In short, the interplay of supply and demand for money would have worked automatically to help curb the excesses of the business and economic cycles. Variations in demand for money should have done what we now depend on the Federal Reserve to do for us -- slow the economy down during a major boom and stimulate it during a major bust.

What do we need the Federal Reserve for anyway? Why not just let banks set interest rates based on market demand for money?

advantages of fixed income investing
advantages of fixed income investing

A question about investing basics

2007-03-12T08:10:00.000-07:00

Here is one of those investing basics that I've always wondered about:

Company stock prices that do better than the market average (beta) during a bull market go down more than the market average during a bear market.

Seems to me that if the market were truly efficient, that wouldn't happen. Here's my logic -- if a company is better managed than average (which makes it price go up more than the average during the bull market), then it should also be better managed during the bear market as well, meaning the stock price should go less than the average.

I gather that part of the answer lies in the differences in how macroeconomic factors affect different businesses -- for instance, some businesses flourish during periods of low interest rates but are taken down more than average during period of high interest rates.

But some of the answer is simply psychology -- during bull markets, investors drive prices of "sexy" stocks higher. These are usually connected to high tech. During bear markets and hard times these companies don't do as well.

Some of this is related to the phase of growth that a company is in. During its intial growth phases its stock price does better than average because traders assume its growth rate will continue for years to be higher than stodgy old "mature" companies that are well established (and which make up most of the market, determinining the market average). But during bad times these companies do worse because they're not established. They don't have reserves to draw on.

So that's another reason to invest in stodgy old "mature" companies that pay dividends. Their stock prices don't go up as much during bull markets, but their prices don't down as far during bear markets.

investing basics
investing basics

Income investing goals don't include penny stock tips

2007-03-11T12:05:00.000-07:00

Since income investing goals don't include buying penny stocks and riding them while they rise in price (you hope) and then selling for a big profit, this information is no good to me. But some of you still probably listen to stock "tips," so may you'll like these. Heck, maybe they're good tips and you'll make money from them.

I get a lot of financial newsletter solicitations in my mail, and most of them try to entice me by profiling a penny stock that the newsletter publisher claims is the most promising they've ever seen, but just a taste of what you'll get if you subscribe to their newsletter.

Has the EPA really mandated that motor oil be changed to eliminate the sulfur and phosphorus that's added to oil? Will Platinum Research Organization (PLRO) really revolutionize the motor oil industry with their formula that improves motor oil performance without causing the emission of sulfur and phosphorus? I don't know, but it does look good.

And I really hope Acro Security Technologies (ACRO) is everything this mailer/promotion claims. They've allegedly found a quick and easy way to test for peroxide-based explosives. That's the kind used on the London and Madrid subway bombings, and the kind used in last summer's plot to blow up airplanes flying from London to the U.S., and the cause of the onerous restrictions on bringing powders, liquids and gels onto airplanes.

While the mailer for PLRO irks me by asserting that human-caused global warming is true (maybe, but not proven yet), the mailer for ACRO makes me glad it recognizes the true threat to the world posed by jihadist terrorists. I hope that ACRO's product catches all of them trying to blow up the world.

If these companies do succeed and grow, and maybe they'll start paying dividends to their shareholders. That's when I'll be interested. I don't like gambles. And I don't like selling stock to get the benefit of a gamble I took.

income investing goals
income investing goals

Growth real estate investing info

2007-03-10T10:56:00.000-08:00

This article on real estate investing info is interesting in that a company has picked out 10 areas of big cities that are now considered "up and coming," which -- as the article points out -- is a nice way of saying that the reason the houses are relatively cheap is because of the danger.

The neighborhood listed for St Louis is Tiffany, which I'm somewhat familiar with due to having walked around it many times in the late 1980s when I was a cable TV salesperson. Also, I still work for a government agency and much of that neighborhood is part of our area. Though I don't go there in person now, I see and know many people who stay there.

As the article says, it's multicultural. It doesn't mention that it does not contain any Laotians, because they all moved out years ago -- at the same time, immediately following the shooting death of a Laotian man by an African-American neighbor.

Even when I was selling cable TV, I did notice that there were affluent-looking young whites living in some of the more developed buildings right next to Grand.

Of course, areas do change. When I first started selling cable TV, I felt comfortable walking up and down streets such as Lafayette and McRee. It was years later when I was there and a young African-American said, "What's a white person doing here?"

There's been money pouring into other low-income, high-crime areas of St Louis, such as Dutchtown. I remember driving on Delmar between Grand and Kingshighway and being startled by seeing some brand new, nice red brick houses -- often next door to condemned, dilapidated old buildings.

Seems to me there's a parallel between moving into such high-risk neighborhoods in search of real estate values that you hope will grow a lot as time goes by and the bad people in the neighborhood move away (you hope) and investing in growth stocks. You're taking a gamble. Myself, having lived in South St Louis both before and after it became a "Hood," I would be scared to death to move to such places, even though I can see the attraction for young people looking for affordable places to live and hoping to reduce transportation costs.

The whole gamble depends on enough other people making the same move behind you -- from the suburbs back to the city. Again, I can see the value for young people, but once they have children, they should want to get them out of the St Louis city school system.

So when you buy a growth stock with a good story, get a lot of good investing info. Remember that your future return depends on a lot of other people buying that stock behind you. You may be paying a lot of money for a condo that's next door to a crack house.

investing info
investing info