Investing Curiouscatblog

Category: Investing

  • Warren Buffett’s 2010 Letter to Shareholders

    Warren Buffett has published his always excellent annual shareholder letter. It is a pleasure to read them every year, when they are published, and re-read them at other times of the year.

    Yearly figures, it should be noted, are neither to be ignored nor viewed as all-important. The pace of the earth’s movement around the sun is not synchronized with the time required for either investment ideas or operating decisions to bear fruit. At GEICO, for example, we enthusiastically spent $900 million last year on advertising to obtain policyholders who deliver us no immediate profits. If we could spend twice that amount productively, we would happily do so though short-term results would be further penalized. Many large investments at our railroad and utility operations are also made with an eye to payoffs well down the road.
    …
    At Berkshire, managers can focus on running their businesses: They are not subjected to meetings at headquarters nor financing worries nor Wall Street harassment. They simply get a letter from me every two years and call me when they wish.
    …
    From a standing start in 1985, Ajit has created an insurance business with float of $30 billion and significant underwriting profits, a feat that no CEO of any other insurer has come close to matching. By his accomplishments, he has added a great many billions of dollars to the value of Berkshire.
    …
    At bottom, a sound insurance operation requires four disciplines… (4) The willingness to walk away if the appropriate premium can’t be obtained. Many insurers pass the first three tests and flunk the fourth. The urgings of Wall Street, pressures from the agency force and brokers, or simply a refusal by a testosterone-driven CEO to accept shrinking volumes has led too many insurers to write business at inadequate prices. “The other guy is doing it so we must as well” spells trouble in any business, but none more so than insurance.
    …
    a few have very poor returns, a result of some serious mistakes I have made in my job of capital allocation. These errors came about because I misjudged either the competitive strength of the business I was purchasing or the future economics of the industry in which it operated. I try to look out ten or twenty years when making an acquisition, but sometimes my eyesight has been poor.
    …
    It’s easy to identify many investment managers with great recent records. But past results, though important, do not suffice when prospective performance is being judged. How the record has been achieved is crucial, as is the manager’s understanding of – and sensitivity to – risk (which in no way should be measured by beta, the choice of too many academics). In respect to the risk criterion, we were looking for someone with a hard-to-evaluate skill: the ability to anticipate the effects of economic scenarios not previously observed. Finally, we wanted someone who would regard working for Berkshire as far more than a job.

    Warren Buffett packs in great lessons all throughout the letter. Read it and take them to heart.

    Related: Buffett Calls on Bank CEOs and Boards to be Held Responsible – Warren Buffett’s Q&A With Shareholders 2009 – The Greatest Wall Street Danger of All: You – Warren Buffet Webcast to MBAs – Warren Buffett’s 2007 Letter to Shareholders – Warren Buffett’s Annual Report
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  • Investment Risk Matters Most as Part of a Portfolio, Rather than in Isolation

    The biggest investing failing is not saving any money – so failing to invest. But once people actually save the next biggest issue I see is people confusing the investment risk of one investment in isolation from the investment risk of that investment within their portfolio.

    It is not less risky to have your entire retirement in treasury bills than to have a portfolio of stocks, bonds, international stocks, treasury bills, REITs… This is because their are not just risk of an investment declining in value. There are inflation risks, taxation risks… In addition, right now markets are extremely distorted due to the years of bailouts to large banks by the central banks (where they are artificially keeping short term rates extremely low passing benefits to investment bankers and penalizing individual investors in treasury bills and other short term debt instruments). There is also safety (for long term investments – 10, 20, 30… years) in achieving higher returns to gain additional assets – increased savings provide additional safety.

    Yes, developing markets are volatile and will go up and down a lot. No, it is not risky to put 5% of your retirement account in such investments if you have 0% now. I think it is much riskier to not have any real developing market exposure (granted even just having an S&P 500 index fund you have some – because lots of those companies are going to make a great deal in developing markets over the next 20 years).

    I believe treating very long term investments (20, 30, 40… years) as though the month to month or even year to year volatility were of much interest leads people to invest far too conservatively and exacerbates the problem of not saving enough.

    Now as the investment horizon shrinks it is increasing import to look at moving some of the portfolio into assets that are very stable (treasury bills, bank savings account…). Having 5 years of spending in such assets makes great sense to me. And the whole portfolio should be shifted to have a higher emphasis on preservation of capital and income (I like dividends stocks that have historically increased dividends yearly and are likely to continue). And the same time, even when you are retired, if you saved properly, a big part of your portfolio should still include assets that will be volatile and have good prospects for long term appreciation.

    Related: books on investing – Where to Invest for Yield Today – Lazy Portfolios Seven-year Winning Streak (2009) – Fed Continues Wall Street Welfare (2008), now bankers pay themselves huge bonuses because the Fed transferred investment returns to too-big-to-fail-banks from retirees, and others, investing in t-bills.

  • 12 Stocks for 10 Years: Feb 2011 Update

    The 12 stock for 10 years portfolio consists of stocks I would be comfortable putting into an IRA for 10 years. The main criteria is for companies with a history of large positive cash flow, that seemed likely to continue that trend.

    The current Marketocracy* calculated annualized rate or return (which excludes Tesco) is 7.6% (the S&P 500 annualized return for the period is 4.8%). Marketocracy subtracts the equivalent of 2% of assets annually to simulate management fees – as though the portfolio were a mutual fund – so without that (it is not like this portfolio takes much management), the return beats the S&P 500 annual return by about 4.8% annually (it would be a bit less with Tesco, but still over 4%).

    In the last 6 months, I sold a portion of the Amazon position (the price seems quit rich for the stock and the portion of the portfolio it represented has increase due to the large gain) and I bought some additional Toyota (due to a good price and to increase the portion of the fund Toyota represented). In the last 6 months Toyota and Danaher have done particularly well.

    The current stocks, in order of return:

    Stock Current Return % of sleep well portfolio now % of the portfolio if I were buying today
    Amazon – AMZN 361% 10% 7%
    Google – GOOG 189% 16% 14%
    PetroChina – PTR 110% 7% 6%
    Templeton Dragon Fund – TDF 96% 10% 10%
    Templeton Emerging Market Fund – EMF 70% 5% 6%
    Danaher – DHR 47% 10% 10%
    Toyota – TM 25% 10% 10%
    Apple – AAPL 25% 6% 5%
    Intel – INTC 2% 5% 7%
    Cisco – CSCO -3% 4% 6%
    Tesco – TSCDY -2%** 0%* 10%
    Pfizer – PFE -20% 5% 7%

    The current marketocracy results can be seen on the Sleep Well marketocracy portfolio page.

    Related: 12 Stocks for 10 Years: Oct 2010 Update – 11 Stocks for 10 Years, July 2010 Update – 12 Stocks for 10 Years, July 2009 Update – hand picked articles on investing
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  • Failing to Save for Retirement Has Consequences

    I have posted about the need to save money while you are working numerous times. Here is a good article looking at the large number of people that have failed to do so and are now retiring.

    Retiring Boomers Find 401(k) Plans Fall Short

    The median household headed by a person aged 60 to 62 with a 401(k) account has less than one-quarter of what is needed in that account to maintain its standard of living in retirement, according to data compiled by the Federal Reserve and analyzed by the Center for Retirement Research at Boston College for The Wall Street Journal.
    …
    Vanguard long advised people to put 9% to 12% of their salaries—including the employer contribution—in their 401(k) plans. The current median amount that people contribute is 9%, counting the employer contribution, Vanguard says.

    Recently, Vanguard has begun urging people to contribute 12% to 15%, including the employer contribution, because of the stock market’s weak returns and uncertainty about the future of Social Security and Medicare.
    …
    Experts estimate Social Security will provide as much as 40% of pre-retirement income, or $35,080 a year for that median family. That leaves $39,465 needed from other sources. Most 401(k) accounts don’t come close to making up that gap.

    The median 401(k) plan held $149,400, including plans from previous jobs, according to the Center for Retirement Research. To figure the annual income from that, analysts typically look at what the family would get from a fixed annuity. That $149,400 would generate just $9,073 a year for a couple, according to New York Life Insurance Co., the leading provider of such annuities— less than one-quarter of the $39,465 needed.

    Just 8% of households approaching retirement have the $636,673 or more in their 401(k)s that would be needed to generate $39,465 a year.

    Knowing exactly what is needed for retirement is difficult. But knowing what is a responsible amount is not. It is certainly no less than 8%, and is likely the 12-15% figure Vanguard recommends. If you start at 10% from the time you join the full time workforce (in your 20’s) then you have some flexibility you can see how thing look when you are 30, maybe 12% is sensible, maybe 15%, maybe 10%. If you fail to save for a decade however, you are likely to need to be at 15%, or higher.
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  • Curious Cat Investing and Economics Carnival #11

    Welcome to the Curious Cat Investing and Economics Carnival: find useful recent personal finance, investing and economics blog posts.

    • 5 Unconventional Ideas That Really Shouldn’t Be – “Before going to college or graduate school, know if this large investment of time and money is the best investment for you. For some people, college or grad school is the best investment. For some, self-education is.”
    • 12 Stocks for 10 Years: Oct 2010 Update by John Hunter – Google is the top holding and top performer up 184% since the inception of the fund, PetroChina is up 102% and Templeton Dragon Fund is up 100%.
    • 7 Ways To Retire Rich and On Time by Laura Adams – “1) Start an investing routine as early as possible. It might surprise you to know that the most important factor for investing success isn’t the investments you choose—it’s time… Compounding interest is a powerful force that can make even the most inexperienced investor rich… 4) Increase your savings rate each year. “
    • 10 stocks for the next 10 years by James Jubak – “Johnson Controls (JCI). The stock did amazingly well in 2010—up 42.3%–considering that two of the company’s three businesses were in sectors of the economy that had been crushed. 2011 will be a better year for the company’s auto interior and auto battery business and for its building-wide energy efficiency unit… Yingli Green Energy Holding (YGE) is my choice for a horse to ride in China’s solar industry.”
    • Six investing books that never left my bookshelf – “The Intelligent Investor: This has been referred to as the “value investor’s Bible” and the title is deserved. In it, Benjamin Graham, a former Columbia professor and the mentor of Warren Buffett, outlines his value-investing philosophy.”

  • Are Municiple Bonds Safe?

    Municipal bonds seem safe. But the incredible long period of irresponsible spending and taking on long term liabilities (pensions, health care costs, infrastructure to maintain) and low taxes and selling off future income streams (to consume today) leaves those bonds with questionable financial backing in many locations. Municipal bond investments should be examined more closely today in light of the problems in the market.

    Video shows the State Budgets: The Day of Reckoning by 60 minutes.

    Wave of Muni Defaults to Spur Layoffs, Social Unrest: Whitney

    Responding to the uproar over her “60 Minutes” interview broadcast on CBS Sunday night, Whitney defended her prediction that at least 50 to 100 cities and towns could default on their debt as states and the federal government cut back on financial support.

    Muni experts, including an analyst from Standard & Poor’s, dismissed her predictions, saying the numbers don’t add up.
    …
    “States clearly have been funding municipal governments—for now up to 40 percent of their total expenditures,” she explained. “As the states become more compromised from a fiscal standpoint, that funding is going to end.”
    …
    Whitney added that it’s way too soon to see muni bonds as a buying opportunity. But she said that can change quickly.

    “When you start to see the first major defaults in this area [the states and cities], when you see more defaults and indiscriminate selling—if you do your research now and figure out who’s protected where and which revenues are protected, there will be great buying opportunities,” Whitney said.

    “People are complacent about these defaults. The news about all this isn’t out there yet,” Whitney went on to say. “And only when it is out there, then there will be a buying opportunity [for munis].”

    Related: USA State Governments Have $1,000,000,000,000 in Unfunded Retirement Obligations – NY State Raises Pension Age to Save $48 Billion – What the Bailout and Stimulus Are and Are Not – posts on bonds

  • Consumer Debt Down, but Still Over $2.4 Tillion in the USA

    Consumers debt decreasing very slowly. In the 3rd quarter it decreased at an annual rate of 1.5%, after decreasing at a 3.25% rate in the second quarter. Revolving credit (credit card debt) decreased at an annual rate of 8.5% (compared to 9.5% in the second quarter), and nonrevolving credit (car loans…, not including mortgages) was up 2.5% (versus essentially unchanged).

    Revolving consumer debt now stands at $814 billion down $52 billion this year. That is on top of a $92 decline in 2009. Hopefully we can increase the size of the decrease going forward. As individuals we should aim to have no consumer debt and build up cash reserves instead (the way the debt figures are calculated though, even if you don’t really have any debt, say you pay off your credit card bill each month, I believe your balance is still seen as “debt”, it is credit extended to you).

    On September 30, 2010 total outstanding consumer debt was $2,411 billion (a decline of just $8 billion in the 3rd quarter, after a decline of $21 billion in the 2nd quarter). This still leaves over $8,000 in consumer debt for every person in the USA and $20,000 per family.

    Consumer debt grew by about $100 billion each year from 2004 through 2007. In 2009 consumer debt declined over $100 billion: from $2,561 billion to $2,449 billion. For the first 3 quarters of 2010 it has declined just $38 billion.

    The huge amount of outstanding consumer and government debt remains a burden for the economy. At least some progress is being made to decrease consumer debt. Credit card delinquency rates have actually been decreasing the last couple of year (from a high of 6.75% in the 2nd quarter of 2009 to 5% in the 2nd quarter of 2010 (I would guesstimate the average for the decade was 4.5%).

    Those living in USA have consumed far more than they have produced for decades. That is not sustainable. You don’t fix this problem by encouraging more spending and borrowing: either by the government or by consumers. The long term problem for the USA economy is that people have consuming more than they have been producing.

    We can’t afford to seek even more short term spending powered by more debt. Government debt has been exploding so unfortunately that problem has continued to get worse.

    Data from the federal reserve.

    Related: Consumers Continue to Slowly Reduce Their Debt Level – The USA Economy Needs to Reduce Personal and Government Debt – Consumer debt needs to decline much more.

  • Avoiding Withdrawing Retirement Savings Starts Early

    In the USA we fail to save nearly enough for retirement by and large. And fail to save emergency funds or prepare for economically difficult times. We by and large chose to spend today and hope tomorrow will be good rather than first establishing a good financial safety net before expanding spending.

    When people are debating withdrawing from their retirement account it is actually not the important decision it seems to be (normally). Normally the important decision was years before when they chose to take on consumer debt and not to build up an emergency fund. And when they failed to just build up saving beyond that which could be used for nice vacations, a new car, or to live on in economically challenging times.

    If someone had been saving 15% of their salary in retirement since they started working if they took an amount that left them at 10% that is hardly a horrible result. While someone that was already behind by say adding just 3% to retirement savings and they took out all of it that would be much worse.

    And we should remember even having a retirement account to withdraw from might put you ahead of nearly 50% of the population (and our state and federal governments, by the way). If you have to resort to withdrawing from your retirement account don’t think of that as the failure. The failure was most likely the lack of savings for years prior to that. And as soon as possible, re-fund your retirement account and build up a strong emergency fund, even if that means passing spending on things you want.

    Related: Retirement Savings Allocation for 2010 – 401(k)s are a Great Way to Save for Retirement – Save Some of Each Raise

  • Google Finance Portfolio Charting

    investment portfolio charting from Google Finance
    Google finance has a nice new feature to let you chart your entire portfolio. You can then compare it to the S&P 500 or other stocks. This is a very nice feature. Yahoo Finance is about the only part of Yahoo I still use. I do use Google Finance some but they still fall short and I use Yahoo Finance much more. This feature will at least encourage me to put my portfolio in Google and start tracking it.

    It would be great if this could give you portfolio annual rates of return (including factoring in cash additions and withdraws and keeping track of sales over time to show a true view of the portfolio). It does look like it will factor in stock purchases and sales which is very nice. You can import csv files with transaction history – another nice feature.

    It also strikes me as a very smart move (as a Google stockholder that is nice to see) as advertising rates around investing are high. The more time Google can provide financial advertisers the more income they can make.

    Related: Lazy Portfolios Seven-year Winning Streak – Google Posts Good Earning But Not Good Enough for Many (April 2010) – Dollar Cost Averaging – Curious Cat Investing Books

  • Bond Yields Stay Very Low, Treasury Yields Drop Even More

    chart showing corporate and government bond yields 2005-2010Chart showing corporate and government bond yields from 2005-2010 by Curious Cat Investing Economics Blog, Creative Commons Attribution, data from the Federal Reserve.

    Bond yields have dropped even lower over the last 6 months, dramatically so for treasury bonds. 10 year Aaa corporate bonds yields have decreased 61 basis points to 4.68%. 10 year Baa yields have decreased 53 basis points to 5.72%. 10 year USA treasury bonds have decreased an amazing 169 basis points to a incredibly low yield of %2.54. The federal funds rate remains under .25%.

    The Fed continues to try and discourage saving and encourage spending by punishing savers with policies to drive interest rates far below what the market alone would set. Partially this is a continuation of their subsidy to the large banks that caused the credit crisis. And partially it is an attempt to find a way to encourage spending to try and build job creation in the economy. The Fed announced they are taking huge steps to purchase $600 billion more bonds in an attempt to lower rates even further (much of the impact has been priced into the market as they have been saying they will take this action – but the size is larger than the consensus expectation). I do not think this is a sensible move.

    Savers do not have many good options for safely investing retirement assets for a reasonable income. The best options are probably to hold short term bonds and money markets and hope that the Fed finally stops making things so difficult for them. But that will take awhile. I think investing in medium or long term bonds (over 4 years) is crazy at these rates (especially government bonds – unless you are a large bank that can get essentially free money from the Fed to then loan the government and make a profit). Dividends stocks may be a good alternative for some more yield (but this needs to be done carefully to not take unwise risks). And I think you to look at investing overseas because these fiscal policies are just too damaging to savers to continue to just wait for a decent rate of return in bonds in the USA. But there are not many good options. TIPS, inflation protected bonds, are another option to consider (mainly as a less bad, of bad choices).

    It is a great time to take on debt however (as often is the case, there are benefits and costs to economic conditions). If you have a mortgage, and can qualify, or are looking to buy a home, mortgage rates are amazingly low.

    Related: Bond Rates Remain Low, Little Change in Last 6 Months (April 2010) – Bond Yields Change Little Over Previous Months (December 2009) – Chart Shows Wild Swings in Bond Yields in Late 2008 – Government Debt as Percentage of GDP 1990-2009 in USA, Japan, Germany, China…