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
Sunday, April 29, 2007
Friday, April 27, 2007
Dow 13,000 Lucky?
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
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
Wednesday, April 25, 2007
Value and Growth Funds Blurring
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
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
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
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
Tuesday, April 24, 2007
Falling into the growth trap
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
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
Monday, April 23, 2007
Latest issue of Barrons
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
leveraging Barrons
leveraging Barrons
Sunday, April 22, 2007
How much time to research investing?
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
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
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