Investing Curiouscatblog

Category: Stocks

  • Apple Tops Google

    Today, the market capitalization of Apple exceeded Google for the first time since Google went public. Both Companies are now valued at $185 billion. In 2007 Google had revenue of $16.6 billion and net profit of $4.2 billion. Apple had revenue of $24 billion and net profit of $3.5 billion. Since Google went public on 27 August 2004 their stock price is up 367% and Apple is up 1064% – both pretty good. I own Google and have it as the largest holding in the 12 stocks for 10 years portfolio.

    Related: Buy Google – Stop Picking Stocks – Lazy Portfolio Results – Great Google Earnings

  • Does a Declining Stock Market Worry You?

    The USA stock market has not been doing so well recently (the S&P 500 index is down over 9% so far this year). And I own S&P 500 indexes in my retirement account (in addition to other index funds). So I am losing money on those investments but I am not worried. It is possible the market will do very poorly over the next few months, year… if the economy struggles (and with the huge credit card like spending Washington much of the last 30 years and huge increases in gas prices that is certainly possible). But I am not worried.

    I don’t plan on using that money for decades. Therefore the short term declines really have no impact on my life. Sure if I was able to move all that money into a money market fund for the decline and then move it back into stock funds for the increase that would be wonderful. But I can’t and no-one has proven to be able to time the market effectively over the long term. It is unlikely you or I will be the ones that do it right. I wouldn’t be surprised if the market was lower at the end of the year, but I wouldn’t be surprised if it was higher either.

    Dollar cost averaging is the best long term strategy (not trying to time the market). And using that strategy, if you assume stocks reach whatever level they do say 20 years from now, I am actually better off will prices falling now – so I can buy more shares now that will reach that final price. 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 (people deciding they didn’t want to take risk, make investments…) to the point that the final value 20 years later is deflated.
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  • 12 Stocks for 10 Years Update – June 2008

    I originally setup the 10 stocks for 10 years portfolio in April of 2005.

    At this time the stocks in the sleep well portfolio in order of returns:

    Stock Current Return % of sleep well portfolio now % of the portfolio if I were buying today
    Google – GOOG 163% 17% 14%
    Amazon – AMZN 124% 7% 7%
    PetroChina – PTR 114% 7% 7%
    Templeton Dragon Fund – TDF 90% 10% 10%
    Templeton Emerging Market Fund – EMF 47% 4% 4%
    Cisco – CSCO 42% 7% 8%
    Toyota – TM 38% 10% 11%
    Tesco – TSCDY 9% 0% 10%
    Intel – INTC 3% 5% 6%
    Danaher – DHR 1% 5% 8%
    Pfizer – PFE -29% 4% 6%
    Dell -30% 7% 6%

    At this point I am most positive on Google, Toyota, Templeton Dragon Fund and Tesco. I am wary of Dell – they seem to be moving in the wrong direction, but I am willing to give them longer to improve. I am even more wary of Prizer but again willing to stick with them for the long term. I will be looking for a suitable replacement.

    In order to track performance I setup a marketocracy portfolio but had to make some minor adjustments. The current marketocracy calculated annualized rate or return (which excludes Tesco) is 9.8% (the S&P 500 annualized return for the period is 7.9%) – marketocracy subtracts the equivalent of 2% of assets annually to simulate management fees – as though the portfolio were a mutual fund – so without that the return is about 10.8%). View the current marketocracy Sleep Well portfolio page.

    Related: 12 Stocks for 10 Years Update (Feb 2008) – Retirement Account Allocations for Someone Under 40 – Lazy Portfolio Results

  • Berkshire Hathaway Annual Meeting 2008

    Every year at the Berkshire Hathaway Warren Buffett and Charlie Munger provide great insights on investing and the economy. Here are some thought from today – Buffett to investors: Think small

    “We would be very happy if we earned 10%, pre-tax” on the additions to Berkshire’s equity portfolio, said Buffett. “Anyone that expects us to come close to replicating the past should sell their stock; it isn’t going to happen. We’ll get decent results over time, but not indecent results.” Added Munger: “You can take what Warren said to the bank. We are very happy at making money at a rate in the future that’s much less than the past… and I suggest that you adopt the same attitude.”
    …
    “Overall I think that the U.S. continues to follow policies that will make the dollar weaken against other major currencies
    …
    Asked what’s in store for the economy, Buffett said he doesn’t have a clue and doesn’t care. “I haven’t the faintest idea,” he said. “We never talk about it, it never comes up in our board meetings or other discussions. We’re not in that business [of economic forecasting], we don’t know how to be in that business. If we knew where the economy was going, we’d do nothing but play the S&P futures market.”
    …
    In terms of the [chief] investment officer, the board has four names, any one or all of whom would be good at my job. They all are happy where they are now [working outside of Berkshire], but any would be here tomorrow if I died tonight, they all are reasonably young, and compensation would not be a big factor…. There will be no gap after my death in terms of having someone manage the money.

    Related: Live From Omaha 2007 – Buffett’s 2008 Letter to Shareholders – 2005 annual meeting with Buffett and Munger – Why Investing is Safer Overseas
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  • Lazy Portfolio Results

    Lazy Portfolios update by Paul Farrell provides some examples of how to use index funds to manage your investments:

    These portfolios are virtually “zero maintenance!” Set them and forget them. Plus you can ignore Wall Street’s relentless, misleading chatter about markets and the economy. Seriously. After customizing your own Lazy Portfolio you can ignore the news and focus on what’s really important: your family, loved ones, friends, your career, hobbies, travel — you name it — anything but wasting time tracking and playing the market.

    I think the article is a bit misleading in showing the out-performance of the S&P 500 index (during periods where the S&P 500 index does very well these portfolios will under-perform it). The out-performance shown in the article is largely due to the great performance of international markets recently. Still the strategy is well worth reading about. The strategy is based on using index funds from Vanguard (very well run mutual funds with very low fees). But don’t get tied into Vanguard, if they start to focus on lining their pockets by increasing your fees look for alternatives.

    Overall, I give this concept high marks. Dollar cost average appropriate levels of money into such a strategy and you will give yourself a good chance at positive results.

    My preference would be to include significant levels of international and developing stocks. For aggressive long term investing I like something like:

    40% USA total stock market
    15% Real Estate
    25% international developed stock market index
    20% developing stock market index

    When aiming for more security and preserving capital (over growth) I favor something like:

    30% USA total stock market
    10% Real Estate
    25% international developed stock market index
    10% developing stock market index
    10% short term bond index
    15% money market

    Of course all sorts of personal financial factors need to be considered for any specific person’s allocations.

    Related: Allocating Retirement Account Assets – Why Investing is Safer Overseas – Saving for Retirement – 12 stocks for 10 years – what is a mutual fund?

  • Beating the Market

    For those that don’t find picking stocks fun it is nice to know that just investing in indexes is likely the best option for almost everyone. I have much of my retirement assets invested in index funds. I still think I can beat the market (though the results of the last few months have not been kind) but the amount I invest in individual stocks is not a huge percentage of my portfolio. I still like Google, for example, and in fact might well be buying more this week (it is down over 10% since I added to my position a couple weeks ago). Can You Beat the Market? It’s a $100 Billion Question

    In 2006, the last year for which he has comprehensive data, this total came to $99.2 billion. Assuming that it grew in 2007 at the average rate of the last two decades, the amount for last year was more than $100 billion. Such a total is noteworthy for its sheer size and its growth over the years – in 1980, for example, the comparable total was just $7 billion, according to Professor French.
    …
    From 1986 to 2006, according to his calculations, the proportion of the aggregate market cap that is invested in index funds more than doubled, to 17.9 percent. As a result, the negative-sum game played by active investors has grown ever more negative.

    The bottom line is this: The best course for the average investor is to buy and hold an index fund for the long term. Even if you think you have compelling reasons to believe a particular trade could beat the market, the odds are still probably against you.

    Interesting. I am surprised by the rapid increase in the total expense of trying to beat the market. I guess all those wall street bonuses add up. In my opinion the article does not provide adequate support the claims made, but I think overall the claim are sensible (based on numerous studies of results). The odds of beating the market yourself are very low. And the odds of paying the right people to beat the market for you are likely not worth the cost (in the market today).

    Related: Advice from Warren Buffett – Stop Picking Stocks? – 12 Stocks for 10 Years Update – Feb 2008

  • Warren Buffett’s Letter to Shareholders

    As usual, Warren Buffett’s letter to shareholders is packed with wisdom. Berkshire Hathaway 2007 Letter to Shareholders:

    We will soon purchase 60% of Marmon and will acquire virtually all of the balance within six years. Our initial outlay will be $4.5 billion, and the price of our later purchases will be based on a formula tied to earnings.
    …
    This deal was done in the way Jay would have liked. We arrived at a price using only Marmon’s financial statements, employing no advisors and engaging in no nit-picking. I knew that the business would be exactly as the Pritzkers represented, and they knew that we would close on the dot, however chaotic financial markets might be. During the past year, many large deals have been renegotiated or killed entirely. With the Pritzkers, as with Berkshire, a deal is a deal.
    …
    Charlie and I look for companies that have a) a business we understand; b) favorable long-term economics; c) able and trustworthy management; and d) a sensible price tag. We like to buy the whole business or, if management is our partner, at least 80%. When control-type purchases of quality aren’t available, though, we are also happy to simply buy small portions of great businesses by way of stock market purchases….

    A truly great business must have an enduring “moat” that protects excellent returns on invested capital. The dynamics of capitalism guarantee that competitors will repeatedly assault any business “castle” that is earning high returns. Therefore a formidable barrier such as a company’s being the lowcost producer (GEICO, Costco) or possessing a powerful world-wide brand (Coca-Cola, Gillette, American Express) is essential for sustained success. Business history is filled with “Roman Candles,” companies whose moats proved illusory and were soon crossed.
    …
    Susan came to Borsheims 25 years ago as a $4-an-hour saleswoman. Though she lacked a managerial background, I did not hesitate to make her CEO in 1994. She’s smart, she loves the business, and she loves her associates. That beats having an MBA degree any time. (An aside: Charlie and I are not big fans of resumes. Instead, we focus on brains, passion and integrity.
    …
    I should emphasize that we do not measure the progress of our investments by what their market prices do during any given year. Rather, we evaluate their performance by the two methods we apply to the businesses we own. The first test is improvement in earnings, with our making due allowance for industry conditions. The second test, more subjective, is whether their “moats” – a metaphor for the superiorities they possess that make life difficult for their competitors – have widened during the year.
    …
    You will recall that in our catastrophe insurance business, we are always ready to trade increased volatility in reported earnings in the short run for greater gains in net worth in the long run.
    …
    The U.S. dollar weakened further in 2007 against major currencies, and it’s no mystery why: Americans like buying products made elsewhere more than the rest of the world likes buying products made in the U.S. Inevitably, that causes America to ship about $2 billion of IOUs and assets daily to the rest of the world. And over time, that puts pressure on the dollar.
    …
    What is no puzzle, however, is why CEOs opt for a high investment assumption: It lets them report higher earnings. And if they are wrong, as I believe they are, the chickens won’t come home to roost until long after they retire.

    A must read for all investors.

    Related: Buffett Letter to Shareholders (from last year) – Live From Omaha (2007) – Overview of Warren Buffett

  • Buy Google

    I bought some more Google yesterday. Google has fallen from almost $750 a share to $450 a share. Now before some people get excited about how bad that is: until about 18 months ago Google had never been as high as $450 a share. Anyway, I think at this price it is a great long term buy. Time will tell whether I was wise or foolish. FYI, $450 is over 100% above my original purchase price a few years ago. I am happy it has fallen and given me this opportunity to purchase more.

    Related: 12 Stocks for 10 Years Update (Feb 2008) – Is Google Overpriced? – Great Google Earnings (April 2007) – Stop Picking Stocks – post on our management blog on Google

  • Great Advice from Warren Buffett

    Great advice from Warren Buffett. He spoke to students at UTexas at Austin business school and one of the students, Dang Le, posted notes of the discussion online. The internet is great.

    On diversification:

    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.

    Great advice. Warren Buffett uses great concentration (little diversification) but you are not Warren Buffett.

    There are $10 billion mistakes of omission that no one knows about; they don’t show up in the accounting. In 1994 we paid $400 worth of Berkshire stock for a shoe company. The company is now worth 0, but the stock is worth $3.5 billion. So now, I’m happy to see Berkshire go down since it reduces the size of my mistake. In 1973 Tom Murphy offered us NBC for $35 million, but we turned it down. That was a huge mistake of omission.
    …
    Getting turned down by HBS [Harvard Business School] was one of the best things that could have happened to me, bad luck can turn out to be good.
    …
    We did an informal office survey by looking at the total tax footprint versus the total income. I earned 46 million and paid a tax rate of 17.5%. My rate was the lowest, the average was 33%, and my cleaning lady paid 40%. The system is tilted towards the rich. The Forbes 400 total net worth has gone from 220 billion to 1.54 trillion, an increase of 7-to-1. You see in legislature that there is lobbying carried on by the powerful over issues such as the estate tax and carried interest for private equity investments. We need to flatten income and payroll taxes, and those making under $30,000 shouldn’t be bothered.

    It is hard to beat reading Warren Buffet’s ideas on investing and economics.

    Related: Buffett on Taxes – The Berkshire Hathaway Meeting 2007 – Buffett’s 2006 Letter to Shareholders – Warren Buffett’s 2004 Annual Report – books on investing

  • Covered Call Options, etc.

    Options are a tool that investors can use within their portfolio in various ways. They can be used to speculate and they can be used to provide a bit of extra income (with the cost of potentially losing big gains). Mainly they are for more sophisticated investors. Form the Curious Cat Investing Glossary – Stock Options:

    For example, if you own 100 shares of Cisco you could sell a covered call option giving someone the right to buy your shares at a specific price by a certain date. So, for example, they pay you $200 for the right to buy you 100 shares at $1 more than it is selling at right now anytime in the next 2 months. They might chose to do so, in order to leverage their investment as it only cost them $200 to benefit from the rise of 100 shares of Cisco. Of course, if it doesn’t go up in 2 months you benefit because you get to keep the cash and your stock.

    Selling covered call options allows the investor to earn a bit of extra money but they will lose out if the stock shoots up as then the investor that bought the option can buy your shares at the agreed to price even if it now is $5 a share more. Read more on options including naked puts, naked calls…

    Employees may receive options to buy company stock at a Company’s stock at a set price for several years in the future. In general, those options cannot be traded on the market (the employee must keep them or exercise them – pay the strike price to purchase the stock). Why are options such a nice perk if you must pay the strike price? Because they are often good for years and the strike price is set at today’s price (though this doesn’t have to be the case). On the whole stocks go up over time so most of the time the stock will increase in value over the years and the options to buy it at the price several years ago is very valuable. For startup companies, there is often a high likelihood of going out of business in which case the options are worthless, but if the company is successful the options can be worth a great deal.

    Related: Hedging an investment – Books on Speculation with Investment – Google to Let Workers Sell Options Online