Investing Curiouscatblog

Tag: Stocks

  • Market Inefficiencies and Efficient Market Theory

    Find below some interesting thoughts on financial markets and the efficient market theory. That theory essentially says the market prices are right given the available information. I think markets are somewhat efficient but there are plenty of opportunities to profit from inefficiencies in the market. Still it is not easy to consistently exploit these inefficiencies profitably.

    Capital Market Theory after the Efficient Market Hypothesis

    People see high returns in a particular sector, and they cannot tell whether the lower returns they are receiving are due to their fund manager’s proper avoidance of risk, or incompetent management. As they increasingly conclude that incompetence is to blame, funds shift to the new sector and this creates a self-reinforcing process where prices are driven above their fundamental values, i.e. a bubble occurs. It seems like such reallocation of investment funds could, if driven by a strong enough incentive, be enough on its own to drive a bubble even without an external source of liquidity.

    Capital market theory after the efficient market hypothesis by Dimitri Vayanos and Paul Woolley

    Capital market booms and crashes, culminating in the latest sorry and socially costly crisis, have discredited the idea that markets are efficient and that prices reflect fair value.
    …
    Theory has ignored the real world complication that investors delegate virtually all their involvement in financial matters to professional intermediaries – banks, fund managers, brokers – who dominate the pricing process.

    Delegation creates an agency problem. Agents have more and better information than the investors who appoint them, and the interests of the two are rarely aligned.
    …
    he new approach offers a more convincing interpretation of the way stock prices react to earnings announcements or other news. It also shows how short-term incentives, such as annual performance fees, cause fund managers to concentrate on high-turnover, trend-following strategies that add to the distortions in markets, which are then profitably exploited by long-horizon investors. At the level of national markets and entire asset classes, it will no longer be acceptable to say that competition delivers the right price or that the market exerts self-discipline.

    Related: Nicolas Darvas (investor and speculator) – Beating the Market, Suckers Game? – Lazy Portfolios Seven-year Winning Streak – Stop Picking Stocks? – Don’t miss future gains just because you missed past gains

  • Retirement Savings Allocation for 2010

    I adjusted my future retirement account 401(k) allocations today. I do not have as favorable an opinion of investing in the stock market today as I did a year ago. I would likely have allocated 20% to a money market fund except my 401(k) actually has two options – 1 paying 0.0% and the other paying -.02%.

    They seem to believe they should make a significant profit while providing a horrible return (they are still taking over .5% of assets in fees – even though rates do not cover their fees). Those running funds have very little interest in providing value for 401(k) participants – they are mainly interested in raising fees (though supposedly they are suppose to be run by people with a fiduciary responsibility to the investors). Unfortunately most 401(k)s lock you away from the best options for an investor (such as Vanguard Funds).

    My current allocation for future funds is 40% to USA stocks, 40% to Global stocks and 20% to inflation adjusted bonds. My current allocation in this retirement account is 10% real estate, 35% global stocks, 55% USA stocks. For all my retirement savings it is probably about 5% real estate, 35% global stocks, 5% money market, 55% USA stocks (which is a fairly aggressive mix).

    As I have said many times I do not like bonds at this time. I don’t think the interest nearly justifies the risk of capital loss (due to inflation or interest rate risk). Inflation protected bonds are a much more acceptable option for someone that is worried about inflation (like I am over the next 10-20 years).

    A number of the stock fund (even bond fund) options in my 401(k) have expense ratios above 1%. That is unacceptable. The average fees on the options I chose were .5%.

    With my employee match I am adding over 10% of my income to my 401(k), which I think is a good aim for most everyone. Far too many people are unwilling to forgo luxuries to save appropriately for their retirement. This is a sign of financial illiteracy and an unwillingness to accept the responsibilities of modern life.

    Related: Investing – My Thoughts at the End of 2009 – 401(k)s are a Great Way to Save for Retirement – Saving for Retirement – Managing Retirement Investment Risks

  • Investing – My Thoughts at the End of 2009

    In December 2008 I decided to substantially increase my investments in the stock market. This turned out to be quite successful. As I said at the time, the economy continues to struggle and the prospects for 2009 did not look good. And I even guessed the stock market (in the USA) would be lower 12 months from now. But, I also said I was far from certain, in that guess and that I had been increasing my stock investment and would continue to do so.

    At this time my retirement contributions are going 100% to stock investments (if I were close to retirement I would not do this). I am likely going to reduce the contributions going forward (maybe 75% stocks – 25% money market). Unfortunately my retirement fund does not have great alternatives – it has very good real estate options but I am not ready to start putting new funds there (though I likely will during 2010, at some point).

    I did sell reduce my equity exposure in a retirement account that I am not adding to this month. It reduced my overall equity exposure of my portfolio by a couple percentage points, at most. It is still significantly higher than a year ago, due to the incredible gains for 2009 in my stock investments.

    Last year I fully fund my Roth IRA, in January and bought Amazon (AMZN), Templeton Emerging Market Fund (EMF) and PetroChina (PTR). I will fully fund the Roth IRA in January again. I am leaning toward some combination of Templeton Emerging Market Fund (EMF), Vanguard Emerging Markets Stock (VWO), Toyota (TM) and maybe Danaher (DHR). I purchased all of those in my non-retirement account in 2009.

    Investing well is not easy. Saving money is though, sometime people get these confused. You need to save money for retirement – aim for 10% of your income and invest that conservatively if you do not wish to focus on investing. I have no question fully funding your Roth IRA is a wise move for almost everyone. How to invest once you do that is a bit trickier but funding it is not a difficult question to answer. It was not easy to increase investments into stocks last year, when so many others were selling (and the press is full of stories reinforcing the bad news, bad prospects and risks). You can get great opportunities when others are panicking, but things do not always recovery so nicely.

    What the next year holds, again for 2010, if very difficult to see. The economy looks to be in much better shape than a year ago. But it is far from strong. And the recovery in the stock market means the higher prices stocks command today leave more downside risk for stocks, if things do not go well. I am more concentrated in stocks now than I was a year ago, but I am not comfortable with that. I don’t see bonds, even short term bonds, as an acceptable alternative. The risks are not at all justified by the returns in my opinion. I am happy with my real estate investments and may even look to increase that area though I think it may be too early for commercial real estate. I think individual companies may well prosper even if the economy falters – such as Google, Amazon, Danaher, Toyota, Tesco (though Amazon’s price increases may already have more than accounted for this) – all of these are in my 12 stocks for 10 years portfolio.

    Related: Save Some of Each Raise – It is Never to Late to Invest – Does a Declining Stock Market Worry You? – Uncertain Economic Times

  • Amazon Soars on Good Earnings and Projected Sales

    Amazon’s stock price is up 25% to $117 today, after announcing good earnings and increasing sales projections for the 4th quarter. I own stock in Amazon and have it in my 12 stocks for 10 years portfolio. That portfolio is currently beating the S&P 500 by 500 basis points (for annualized return) with a beta of .96 (meaning with a bit less risk than the S&P 500 historically and an alpha of 4.7).

    Operating cash flow for Amazon was $2.25 billion for the trailing twelve months, compared with $1.27 billion for prior year. Free cash flow increased 98% to $1.92 billion from $0.97 billion for the trailing twelve months.

    Net sales increased 28% to $5.45 billion in the third quarter, compared with $4.26 billion in third quarter 2008. Operating income increased 62% to $251 million in the third quarter, compared with $154 million in third quarter 2008.

    Net income increased 68% to $199 million in the third quarter, or $0.45 per diluted share, compared with net income of $118 million, or $0.27 per diluted share, in third quarter 2008.

    “Kindle has become the #1 bestselling item by both unit sales and dollars – not just in our electronics store but across all product categories on Amazon.com. It’s also the most wished for and the most gifted. We are grateful for and energized by this customer response,” said Jeff Bezos, founder and CEO of Amazon.com. “Earlier this week we began shipping the latest generation Kindle. Its 3G wireless works in the U.S. and 100 countries, and we’ve just lowered its price to $259.”

    North America segment sales, representing the Company’s U.S. and Canadian sites, were $2.84 billion, up 23% from third quarter 2008. International segment sales, representing the Company’s U.K., German, Japanese, French and Chinese sites, were $2.61 billion, up 33% from third quarter 2008. Worldwide Electronics & Other General Merchandise sales grew 44% to $2.36 billion.

    For the quarter that ends in December, Amazon forecast sales of $8.1 billion to $9.1 billion (compared with $8.19 billion in previous analyst estimates).

    Amazon continues to build a strong company for the long term. I must admit I think the current stock price might be a bit too high. But I believe in the long term success of the company. They continue to make intelligent, customer focused decisions.

    Related: 12 Stocks for 10 Years – July 2009 Update – Another Great Quarter for Amazon (July 2007) – Very Good Amazon Earnings (April 2007) – Amazon Innovation – Jeff Bezos and Root Cause Analysis – Jeff Bezos management quotes

  • Nouriel Roubini Believes Stock Market has Risen too Far, too Fast

    Nouriel Roubini is still worried about the US economy, though he does believe we are coming to the end of the severe recession we have been in.

    I believe, that if you were worried about your portfolio being overweighted in stocks late last year, now is a good time to move some money out of the stock market. In December 2008, when many were selling in panic, I invested more in stocks.

    The stock market has been on a tear increasing

    1 December 2008 the S&P 500 was at 816
    1 January 2009 – 903
    6 March 2009 – 684 (the lowest point since 1996)
    1 May 2009 – 878
    1 August 2009 – 987
    5 October 2009 – 1040

    In 6 months, since the market hit a low on March 6th, it is up 52%. Certainly the decrease in prices seemed overdone. The 50% increase in prices seems overdone also. But trying to predict short term moves in the stock market (say under 1 year) is very difficult and few people can do so successfully (even if you can find lots of people offering their guesses). Predicting the economy, while not easy, is much much easier that predicting the stock market.
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  • It is Never to Late to Invest

    I like to buy stocks cheap and then hold them as they rise in price. This is not a unique desire, I know. One thing this lead me to do was find a stock I liked but hold off buying it until I could buy it for less. When that works it is great. However, one thing that happened several times is that I found stocks I really liked and they just went up and went up more and kept going up. And I never owned them.

    I learned, after awhile, that is was ok to buy a stock at a higher price once I realized I made a mistake. Instead of just missing out because I made a mistake and didn’t buy it at a lower price than I needed to pay today (which made it feel really lame to buy it now at a higher price) I learned to accept that buying at the higher price available today was the best option.

    I have seen two types of situations where this takes place: one I realize I was just way off, it was a great deal at the price I could have bought at – I just made a mistake. And if it was still a good buy, I should buy it. Another is that the stock price goes up but new news more than makes up for the increased stock price (the news makes the value of stock increase more than the price has increased).

    I missed out on the Google IPO, even though I really wanted to buy. Then the price went way up and even though I had learned this (don’t avoid buying a stock today just because you made the mistake of not buying it at a lower price earlier) tip I wanted to buy it for less than the current price and so kept not buying it (emotion is a real factor in investing and that is another thing I have realized – you need to accept it and deal with it to be a good investor). Then Google announced spectacular earnings and it was finally enough to get me to buy the stock a few days later at $219 (which was well over twice the price 6 months earlier). But it was a great buy at $219 and losing that just because I should have bought it at $119 is not wise – but something I did many times in the past.

    In March of 2009 I bought some ATPG at $3.20. In August I bought more at $11. The news was bit better but really it was just a huge huge bargain at $3.20 and I should have bought a lot more. In the last 5 trading days ATPG was up $5.12 (16.78 – 11.66). A nice gain. Right now, it is up another 68 cents today at $17.43. Now this is a volatile stock and until I sell it may not turn out to be profitable investment, but the odds are good that it will.

    It is also hard to know when to sell – in fact for many selling at the wrong time (either selling too late – after it collapses [for good or sell it after a collapse only to see it recover], or too early missing out on huge gains) is the biggest problem they have in becoming a successful investor). One trait of many successful investors is holding the right investments for huge gains. A few stellar performances can lift the entire portfolio to long term investing success. And if you sell those stocks early you miss huge opportunities.

    Holding on for the huge gains is a mistake I do not want to make – and so when the opportunity is there for such gains I am willing to risk losing some gains for the potential of a much larger gain. Right now the balance is keeping me from selling any ATPG, though I am likely to sell some if it increases (while continuing to hold some of the position).

    Related: Great Google Earnings April 2007 – Nicolas Darvas (investor and speculator) – Not Every Day is Profitable – Does a Declining Stock Market Worry You? – 401(k)s are a Great Way to Save for Retirement – Beating the Market, Suckers Game? – Sleep Well Fund

  • Mark Mobius on Emerging Markets

    Mark Mobius is an investment manager with Franklin-Templeton that I have invested with for over a decade (through the Templeton Emerging Markets Trust and Templeton Dragon Fund – they are closed end funds). I believe in Templeton’s emerging market investment team and Mark Mobius and believe his thoughts are worth paying attention to. He recently wrote an overview on Emerging Markets:

    Year-to-date, however, emerging markets were still up 51%. While Eastern European and Latin American markets continued to record positive returns, Asian markets, as represented by the MSCI AC Asia ex Japan index lost 3%.
    …
    In Mexico, GDP contracted 10% y-o-y in the second quarter of 2009 as a result of the global economic crisis and swine flu outbreak. In comparison, GDP fell 8% in the first quarter of the year. Declines in the manufacturing, construction and retail sectors had negatively impacted GDP during the period.
    …
    Since 1995, portfolio inflows into emerging markets have totaled more than US$123 billion. A significant amount, considering it includes the US$49 billion in net outflows in 2008 as a result of the global financial crisis. The recovery in emerging markets and hunt for attractive investment opportunities, however, saw these funds return just as quickly with inflows totaling more than US$44 billion in the first seven months of 2009, nearly 90% of the outflows registered all of last year.
    …
    Emerging markets account for more than 80% of the world’s population. With economic growth accelerating and population growth decelerating, per capita income is one the rise. In our view, markets such as China, India and Brazil stand at the front of the class.
    …
    As of end-August 2009, the benchmark MSCI Emerging Markets index had a P/E of 16 times, cheaper than the MSCI World index which was trading at a P/E of 21 times.

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  • Tesco: Consistent Earnings Growth at Attractive Price

    Tesco is one of the holdings in my 12 stocks for 10 years portfolio (currently returning 450 basis point above S&P 500 annually). I agree with this well documented post – Tesco: Consistent Earnings Growth at Attractive Price

    Tesco is the largest UK retailer and the 3rd largest global retailer. Tesco controlled 30.8% of the UK grocery market as of May 2009 and ~9% of the UK non-food retail market.
    …
    Tesco has leading market share positions in Hungary (#1), Thailand (#1), Ireland (#2), S. Korea (#2), Malaysia (#2), Slovakia (#3), Poland (#4) and Czech Republic (#4).

    The company entered China several years ago and plans to open more hypermarkets and shopping centers over the next decade. The Chinese retail market remains very fragmented and the top three players each control less than 1% market share.
    …
    Tesco generated £5 billion in operating cash flow last year, benefiting from improvement in working capital efficiency and good inventory management. Its capital expenditures were £4.7 billion last year (£2.6 billion in UK and £2.1 billion in international). The company expects its capital expenditures to decline to £3.5 billion this year through spending less on mixed use development land and purchasing fewer existing stores from UK competitors.
    …
    Tesco ended the year with £9.6 billion in net debt, up £3.4 billion from the prior year… Nevertheless, its interest coverage ratio was 8.9x last year and does not appear too aggressive.

    A big part of my reason for buying Tesco is their management teams commitment to lean thinking (Toyota Production System) management methods. I still worry they will not continue to adopt these methods more thoroughly but I believe superior management methods are one reason their performance has been good in the past and should improve even more if they continue to apply those methods more.

    Related: Jubak Looks at 5 Technology Stocks – 10 Stocks for Income Investors – Small Business Profit and Cash Flow – GM and Citigroup Replaced by Cisco and Travelers in the Dow

  • Lazy Portfolios Seven-year Winning Streak

    Here is an excellent article on how to invest in the stock market. I personally tweak this advice a bit but it is much better than most advice you get. Basically keep costs down (don’t pay large fees) and diversify. Lazy Portfolios seven-year winning streak by Paul Farrell

    Greed drives this [mutual fund] industry. The “world’s largest skimming operation” has now lost over 50% of America’s savings in the decade since the peak of 2000. The track record of actively managed funds during the recent subprime-credit meltdown continues to prove that the industry is failing America. The only way to invest is with index funds, which make up just 14% of the total.
    …
    In short, even though we know that the average compensation of portfolio managers is often $400,000 to more than a $1 million, the hot-shot managers of these actively managed funds provided no value-added to their funds’ performance. Conclusion: Their investors would be better off investing in index funds.
    …
    Yes, the market was in negative territory the past few years, but still all eight Lazy Portfolios outperformed each of the six actively-managed funds.
    …
    Customize your own Lazy Portfolio following these six rules and you’ll win. More important, you’ll have lots of time left to enjoy what really counts, your family, friends, career, sports, hobbies, living.
    …
    2) Frugality, savings versus financial obesity. Tools like starting early, autopilot saving plans, dollar-cost averaging, frugal living and other tricks are familiar to long-term investors. Trust your frugality instincts — living below your means — it’s a trait common among America’s “millionaires next door.”

    Related: Lazy Portfolio Results (April 2008) – Allocations Make A Big Difference – 12 stocks for 10 years – 401(k)s are a Great Way to Save for Retirement

  • SEC Curtails Abusive Short Sales

    Short selling stock is a tool that can help keep markets more stable. However, short selling can be used to manipulate the market and in the last decade naked short selling has contributed to such manipulation. The SEC has made permanent a temporary rule that was approved in 2008 in response to continuing concerns regarding “fails to deliver” and potentially abusive “naked” short selling. In particular, temporary Rule 204T made it a violation of Regulation SHO and imposes penalties if a clearing firm:

    * does not purchase or borrow shares to close-out a “fail to deliver”
    * resulting from a short sale in any equity security
    * by no later than the beginning of trading on the day after the fail first occurs (Trade + 4 days).

    Cutting Down Failures to Deliver: An analysis conducted by the SEC’s Office of Economic Analysis, which followed the adoption of the close-out requirement of Rule 204T and the elimination of the “options market maker” exception, showed the number of “fails” declined significantly.

    For example, since the fall of 2008, fails to deliver in all equity securities has decreased by approximately 57 percent and the average daily number of threshold list securities has declined from a high of approximately 582 securities in July 2008 to 63 in March 2009. Which still is not acceptable, in my opinion. In general this is a good move by the SEC, but still not sufficient.

    Transparency is increased some by the SEC with the new rules:

    * Daily Publication of Short Sale Volume Information. It is expected in the next few weeks that the SROs will begin publishing on their Web sites the aggregate short selling volume in each individual equity security for that day.
    * Disclosure of Short Sale Transaction Information. It is expected in the next few weeks that the SROs will begin publishing on their Web sites on a one-month delayed basis information regarding individual short sale transactions in all exchange-listed equity securities.
    * Twice Monthly Disclosure of Fails Data. It is expected in the next few weeks that the Commission will enhance the publication on its Web site of fails to deliver data so that fails to deliver information is provided twice per month and for all equity securities, regardless of the fails level.

    Full SEC press release: SEC Takes Steps to Curtail Abusive Short Sales and Increase Market Transparency

    Related: SEC Temporarily Bans Short-selling Financial Stocks – Shorting Using Inverse Funds – Too Much Leverage Killed Mervyns