Investing Curiouscatblog

Category: Stocks

  • Financial Planning Made Easy

    Scott Adams does a great job with Dilbert and he presents a simple, sound financial strategy in Dilbert and the Way of the Weasel, page 172, Everything you need to know about financial planning:

    • Make a will.
    • Pay off your credit cards.
    • Get term life insurance if you have a family to support.
    • Fund your 401(k) to the maximum.
    • Fund your IRA to the maximum.
    • Buy a house if you want to live in a house and you can afford it.
    • Put six months’ expenses in a money market fund. [this was wise, given the currently very low money market rates I would use “high yield” bank savings account now, FDIC insured – John]
    • Take whatever money is left over and invest 70% in a stock index fund and 30% in a bond fund through any discount broker, and never touch it until retirement.
    • If any of this confuses you or you have something special going on (retirement, college planning, tax issues) hire a fee-based financial planner, not one who charges a percentage of your portfolio.

    (more…)

  • Stocks Still Overpriced?

    I don’t actually agree with the contention in this post, but the post is worth reading. I will admit I am more certain of I like the prospect of investing in certain stocks (Google, Toyota, Danaher, Petro China, Templeton Dragon Fund, Amazon [I don’t think Amazon looks as cheap as the others, so their is a bit more risk I think but I still like it]) for the next 5 years than I am in the overall market. But I am also happy to buy into the S&P 500 now in my 401(k).

    Stocks Still Overpriced even after $6 Trillion in Market Cap gone from the Index

    Looking at data since 1936 the average P/E for the S & P 500 is 15.79. The current P/E for the market looking at second quarter data is 24.92. Since that time, the P/E has started to look more attractive but you have to be cautious as to why this is occurring. First, the current P/E ratios are betting that earnings will not take hits in 2009 which they clearly are.
    …
    Even if we assumed a healthy economy, the price is no bargain. Throw in the fact that we are in recession and you can understand why the S & P 500 is still overvalued. We haven’t even come close to the historical P/E of 15.79 which includes good times as well.

    Just to be clear current PE ratios have nothing to do with next year. It would be accurate to say someone making the argument that the S&P 500 is cheap now because of the current PE ratio, is leaving out an important factor which is what will earning be like next year. It does seem likely earnings will fall. But I also am not very concerned about earning next year, but rather earning over the long term. I see no reason to be fearful the long term earning potential of say Google is harmed today.

    Related: S&P 500 Dividend Yield Tops Bond Yield for the First Time Since 1958 – 10 Stocks for 10 Years – Starting Retirement Account Allocations for Someone Under 40 – Books on Investing

  • 10 Stocks for Income Investors

    Recent market collapses have made it even more obvious how import proper retirement planning is. There are many aspects to this (this is a huge topic, see more posts on retirement planning). One good strategy is to put a portion of your portfolio in income producing stocks (there are all sorts of factors to consider when thinking about what percentage of your portfolio but 10-20% may be good once you are in retirement). They can provide income and can providing growing income over time (or the income may not grow over time – it depends on the companies success).

    10 picks for income investors

    Strategy #1: Stocks with current yields at 10% or higher where the dividend payout is sustainable at current levels for a decade or more. If the stock market recovers, of course, the dividend yield will drop, but you don’t care. All you want to know is that if you buy $10,000 in annual cash flow now, you’ll get at least $10,000 of annual cash flow in retirement.
    …
    Strategy #3: Buy common stocks with solid dividends and a history of raising dividends for the long haul. That way you let time and compounding work for you. While you may be buying $1 per share in dividends today with stocks like these, you’re also buying, say, 8% annual increases in dividends. In 10 years, that turns a $1-a-share dividend into $2.16 a share in dividends.

    3 of this picks are: Enbridge Energy Partners (EEP), dividend yield of 15.5%, dividend history; Energy Transfer Partners (ETP), 11.2%, dividend history; Rayonier (RYN), yielding 6.7%, dividend history.

    Of course those dividends may not continue, these investments do have risk.

    Related: S&P 500 Dividend Yield Tops Bond Yield: First Time Since 1958 –
    Discounted Corporate Bonds Failing to Find Buying Support – Allocations Make A Big Difference

  • Google’s Energy Interests

    I believe in the management at Google is doing as good a job as the management at any company. They are not afraid to pursue their convictions even if conventional wisdom says they should not. I believe in Google more than the conventional wisdom. And I have been buying Google stock as it has declined the last 6 months.

    I am perfectly happy for Google’s stock price to continue declining: I will continue to buy. I have no intention of selling for decades. Things could change, that would lead me to sell but right now I am firmly a believer in owning a piece of Google for the long term. I am thrilled to have very smart engineers effectively guiding a company (including sustaining a culture where engineers can provide value without the amount of pointy haired boss behavior found elsewhere) to provide value to customers and users of their services while profiting quite nicely. And at these prices the investment opportunity looks great to me. I still believe in following prudent diversification practices (far less than 10% of my investments are in Google stock)

    Google CEO defiant in defending energy interests

    When he was asked whether financial markets and Google’s shareholders wouldn’t prefer that he focus more on the company’s core businesses, and less on big thoughts on energy use, Schmidt countered, “Why don’t we work on the important problems of the world?”

    He was quick to add that Google has a material interest in lower energy costs to help power its crucial data centers. “We’re going to likely consume more [energy], and we’d like the prices to go down,” he said.
    …
    Schmidt said the bulk of spending on necessary research and development for Google’s ambitious energy plan will have to come from the government. The CEO added that he’s almost certain that an opportunity to tap government largesse is now at hand, as he believes a “stimulus package” will follow the $700 billion Wall Street bailout

    I have written about Google’s focus on energy previously: Google Investing Huge Sums in Renewable Energy and is Hiring – Google.org Invests $10 million in Geothermal Energy – Reduce Computer Waste.

    With most companies I would be very skeptical delving into area pretty far removed from their core business would likely not prove an effective strategy. But I believe Google can be successful with such efforts. Some will certainly fail but Google will manage that fine and have at least one or two payoff in such a large way that all the investments are paid off quite well.

    Related: Google Believes in Engineers – Google’s Underwater Cables – Data Center Energy Needs – 12 Stocks for 10 Years Update – June 2008

  • Dazzling Diversification

    Diversification overrated? Not a chance [the broken link has been removed] by Jason Zweig

    A diversified portfolio always has, and always will, underperform the hottest investment of the moment.

    For anyone with a sustainable ability to identify the hottest investment of the moment, diversification is a mistake. But if you really believe you’ve got that ability, you’re not just mistaken. You need to be hauled off in a straitjacket to the Institute for the Treatment of Investment Insanity.

    Exactly right. As we posted previously Warren Buffett’s diversification thoughts are similar

    If you are a professional and have confidence, then I would advocate lots of concentration. For everyone else, if it’s not your game, participate in total diversification. The economy will do fine over time. Make sure you don’t buy at the wrong price or the wrong time. That’s what most people should do, buy a cheap index fund and slowly dollar cost average into it.

    You have to remember when Warren Buffett says “professional and have confidence” he doesn’t really mean just what those words say. He mean if you are Charlie Munger, George Soros, Jimmy Rodgers and maybe 10 other people alive today (maybe I am too restrictive, maybe he would include 50 more people alive today, but I doubt it).

    Related: Dilbert on Investing – investment risks – Curious Cat Investing and Economics Search Engine

  • How to Thrive When this Bear Market Ends

    How to thrive when this bear dies by Jim Jubak

    Believe it or not, someday, almost certainly within the next 12 months, the bear market will be over. Then investors will have an opportunity to rebuild their wealth if stocks come roaring back, as they typically do.
    …
    In the case of the 2000-02 bear, the initial rush after the end of the bear delivered a huge share of the 101% gain for the bull market that ran from October 2002 through October 2007. In the 16 months from the Oct. 9, 2002, low through Feb. 9, 2004, the S&P 500 gained 47%. The gains from the remaining years of the “great” bull market of the “Oughts” were rather anemic: just 9% in 2004, 3% in 2005 and 14% in 2006.
    …
    If I’m right about the arrival of a secular bear, emerging economies and their stock markets will deliver higher returns, despite relatively slow growth, than the even more slowly growing developed economies. If I’m wrong about the secular bear, emerging economies will still deliver stronger growth than the world’s developed economies. Under either scenario, investors want to increase their exposure to the world’s emerging economies, which deliver more performance bang for less risk than most investors think.

    Jim Jubak is one of my favorite investing writers. He can of course be wrong but he provides worthwhile insight, backed with research, and specific suggestions. I am also positive on the outlook for stocks (though what the next year or so hold I am less certain) and on emerging markets.

    Related: Why Investing is Safer Overseas – Rodgers on the US and Chinese Economies – Beating the Market – The Growing Size of non-USA Economies – Warren Buffett’s 2004Annual Report

  • S&P 500 Dividend Yield Tops Bond Yield: First Time Since 1958

    S&P 500 Payout Tops Bond Yield, a First Since 1958 (site broke the link, so I removed it):

    U.S. stocks’ dividend yields were lower than the yield on 10-year Treasury notes for half a century. Not any more. Dividends paid by Standard & Poor’s 500 Index companies in the past 12 months amounted to 3.51 percent of the benchmark’s closing value yesterday. In early trading today, the 10-year yield fell as low as 3.42 percent.
    …
    Treasuries routinely had higher yields than stocks before 1958, according to Bernstein. When this relationship came to an end, yields were near their current levels. The S&P 500 dividend yield fell 0.58 percentage point, to 3.24 percent, in the third quarter of 1958. The 10-year yield rose about the same amount, 0.6 point, to 3.80 percent.

    Two explanations later emerged for the reversal, he wrote. One held that the economy’s recovery from the 1957-58 recession showed “investors could finally put to rest the widely held expectation of an imminent return to the Great Depression.” The second was the increasing popularity of investing in growth stocks, or shares of companies whose sales and earnings rose at a relatively fast pace. Because of their expansion, the companies often paid below-average dividends.

    Reversal of Fortunes Between Stocks and Bonds

    Even more telling was the relative movements in stock and bond yields over the years. Bernstein calculates that from 1954 to 1969 — while inflation was relatively low and stable — bond and stock yields moved mostly in tandem. But from 1970 to 1999 — the Great Inflation — bond and stock yields moved inversely. From 2000 on, bond and stock yields have been back in sync.

    Arnott takes it a step further. “In a world of deleveraging, both for the financial services arena and for the economy at large, growth is less certain,” he says. “And with the economy eroding sharply, so is inflation. If stocks don’t deliver nominal growth in dividends and earnings, then their yield ‘must’ exceed the Treasury yield, in order to give us any sort of risk premium.”

    Related: Corporate and Government Bond Rates Graph – Highest Possible Returns – posts on interest rates – investing strategy

  • Financial Markets with Robert Shiller

    Financial Markets with Professor Robert Shiller (spring 2008) is a fantastic resource from Open Yale courses: 26 webcast (also available as mp3) lectures on topics including: The Universal Principle of Risk Management, Stocks, Real Estate Finance and Its Vulnerability to Crisis, Stock Index, Oil and Other Futures Markets and Learning from and Responding to Financial Crisis (Guest Lecture by Lawrence Summers).

    Robert Shiller created the repeat-sales home price index with Karl Case that is known as the Case-Shiller home price index.

    Related: Berkeley and MIT courses online – Open Access Education Materials – Curious Cat Science and Engineering Blog open access posts – Paul Krugman Speaks at Google

  • Personal Finance Basics: Dollar Cost Averaging

    With the recent turmoil in the financial market this is a good time to look at Dollar cost averaging. The strategy is one that helps you actually benefit from market volatility simply.

    You actually are better off with wild swings in stock prices, when you dollar cost average, than if they just went up .8% every single month (if both ended with stocks at the same price 20 years later). Really the wilder the better (the limit is essentially the limit at which the economy was harmed by the wild swings and people decided they didn’t want to take risk and make investments.

    Here are two examples, if you invest $1,000 in a mutual fund and the price goes up every year (for this example the prices I used over 20 years: 10, 11, 12, 13, 14, 15, 16, 17, 18, 19, 20, 22, 24, 26, 28, 30, 33, 36,39) you would end up with $40,800 and you would have invested $20,000. The mutual fund went from $10 a share to $39 over that period (which is a 7% return compounded annually for the share price). If you have the same final value but instead of the price going up every year the price was volatile (for example: 10, 11, 7, 12, 16, 18, 20, 13, 10, 16, 20, 15, 24,29, 36, 27, 24, 34, 39) you end up with more most often (in this example: $45,900).

    You could actually end up with less if the price shot up well above the final price very early on and then stayed there and then dropped in the last few years. As you get close to retirement (10 years to start paying close attention) you need to adopt a strategy that is very focused on reducing risk of investment declines for your entire portfolio.

    The reason you end up with more money is that when the price is lower you buy more shares. Dollar cost averaging does not guaranty a good return. If the investment does poorly over the entire period you will still suffer. But if the investment does well over the long term the added volatility will add to your return. By buying a consistent amount each year (or month…) you will buy more share when prices are low, you will buy fewer shares when prices are high and the effect will be to add to your total return.

    Now if you could time the market and sell all your shares when prices peaked and buy again when prices were low you could have fantastic returns. The problem is essentially no-one has been able to do so over the long term. Trying to time the market fails over and over for huge numbers of investors. Dollar cost averaging is simple and boring but effective as long as you chose a good long term investment vehicle.

    Investing to your IRA every year is one great way to take advantage of dollar cost averaging. Adding to your 401(k) retirement plan at work is another (and normally this will automatically dollar cost average for you).

    Related: Does a Declining Stock Market Worry You? – Save Some of Each Raise – Starting Retirement Account Allocations for Someone Under 40 – Save an Emergency Fund

  • Would the Dow Dump General Motors?

    Would the Dow Dump General Motors?

    General Motors may get dumped by the Dow Jones Industrial Average if the nation’s biggest carmaker strikes the wrong kind of bailout deal with the government.
    …
    At this point, it’s not clear if the government will be willing to take on the horribly mismanaged automaker. It’s one thing to save a financial firm that continues to make money and another thing to rescue a business that for decades has been unable to control labor and legacy costs or deliver a product that consumers want. GM could be allowed to declare bankruptcy.
    …
    But for some reason nostalgic Americans refuse to let the carmakers take a hit and learn from their mistakes. A bailout seems to be preferred. It worked so well for Chrysler.
    …
    Is it important to the Dow editors to keep an auto presence in the index?
    …
    And since the Dow is meant to be a barometer of the U.S. market, Toyota and Honda can’t be considered. Then again maybe they should leave a bankrupt company in the Dow. It might be the most accurate barometer of the market yet by tracking all the blue chips that have gone bankrupt.

    I discussed dropping GM from the Dow Jones Industrial Average in December of 2005: “I agree removing GM makes sense, though I see no reason to wait.”

    Related: Dow Jones Industrial Average Changes – Another Great Quarter for Amazon (July 2007) – Stop Picking Stocks – Curious Cat Investing Web Search