Buffett on How to Allocate Captital
Written by Greg Speicher on November 20, 2009 - 0 Comments
At the recent CNBC Town Hall Event at Columbia Warren Buffett and Bill Gates: Keeping America Great, Buffett was asked how an individual investor should allocate capital.
QUESTION: Hi, I’m Brian Seedabalker. I’m a second-year student. Mr. Buffett, it’s great to see you again. I was on the trip to Omaha last month. Thank you for hosting us. My question is, how would you recommend an individual investor who follows the Graham and Dodd philosophy to allocate their capital today?
BUFFETT: Well, it depends whether they are going to be an active investor. Graham distinguished between the defensive and the enterprising and that. So if you are going to spend a lot of time on investment, you know I just advise looking at as many things as possible and you will find some bargains. And when you find them, you have to act. It doesn’t — it hasn’t changed at all since I was here in 1950, 1951. And it won’t change the rest of my life. You start turning pages. When I got out of school, I turned every page in Moody’s 10,000-some pages twice, looking for companies. And you have to find them yourself. The world isn’t going to tell you about great deals. You have to find them yourself. And that takes a fair amount of time. So if you are not going to do that, if you are just going to be a passive investor, then I just advise an index fund more consistently over a long period of time. The one thing I will tell you is the worst investment you can have is cash. Everybody is talking about cash being king and all that sort of thing. Most of you don’t look like you are overburdened with cash anyway. [LAUGHTER] Cash is going to become worth less over time. But good businesses are going to become worth more over time. And you don’t want to pay too much for them so you have to have some discipline about what you pay. But the thing to do is find a good business and stick with it.
BECKY: Does that mean you think we are through the roughest times? You had always kept the cash word around, too.
BUFFETT: We always keep enough cash around so I feel very comfortable and don’t worry about sleeping at night. But it’s not because I like cash as an investment. Cash is a bad investment over time. But you always want to have enough so that nobody else can determine your future essentially. The worst — the financial panic is behind us. The economic spillout which came to some extent from that financial panic is still with us. It will end. I don’t know if it will end tomorrow or next week or next month. Or maybe a year. But it won’t go on forever. And to sit around and try and pick the bottom, people were trying to do that last March and the bottom hadn’t come in unemployment and the bottom hadn’t come in business but the bottom had come in stocks. Don’t pass up something that’s attractive today because you think you will find something way more attractive tomorrow.
Key takeaways:
1. To allocate capital, you need a good search strategy. This requires a lot of hard work, “turning pages” as Buffett calls it. See earlier postings on “Search Strategy” for ideas on how to put together an effective search strategy.
2. It is not possible to pick the bottom. Learn how to value companies, practice until you get good, and buy when you find a good business that you understand, with good management, available at a price that has a mathematical expectancy to meet your minimum hurdle rate, for example 20%.
http://gregspeicher.com/?p=106
Showing posts with label asset allocation. Show all posts
Showing posts with label asset allocation. Show all posts
Saturday 25 December 2010
Four ways investors go wrong
1. Bad market timing. I fear that too often investors attempt to time the markets, which is extremely difficult even for professional money managers.
As I have pointed out many times over the years, it is one thing to identify trends but quite another to pinpoint when they will result in major market turns. Sometimes, the time lag can be many months or even years. Being on the wrong side of the market during that period can prove to be very costly.
2. Aggressive asset allocation. Although it has been repeatedly proven to be the most important single factor in investment performance, many investors fail to use the principles of asset allocation in constructing their portfolios. This frequently results in a higher level of risk than is appropriate [because investors tend to] overweight stocks and/or equity mutual funds and underweight fixed-income securities.
I have seen many cases where people in their sixties and seventies had equity weightings of more than 75% and then were stunned when they lost a lot of money in the market bust of 2008 and 2009. For most people, a disciplined asset-allocation approach is the first step to successful investing.
3. Flawed advice. I just read another study purporting to show that Canadians who use financial advisors are better off than those who don't. This one came from the Investment Funds Institute of Canada (IFIC), most of whose products are sold by advisors.
[According to the report,] households with an advisor had 68 per cent of their money in "market-sensitive" securities (equities and mutual funds) and 32% in "conservative" vehicles (term deposits, savings accounts, bonds).
Those who did not use an advisor were split almost equally—51 per cent market-sensitive to 49 per cent conservative. I suspect that a similar U.S. study would produce comparable results.
Financial advisors, like all other professionals, aren't perfect. Sometimes the guidance they offer simply isn’t appropriate, either because it is inconsistent with a person's objectives and risk tolerance or because it is motivated at least in part by commissions. So, it is always a good idea to ask questions and be sure you understand exactly what you're buying before taking the plunge.
4. Pure speculation. Some people like to gamble, pure and simple. I have always said that the place for that is a casino, not the stock market, but there are investors who can't resist. Occasionally, they make a big score. More often, they lose their stake.
Successful long-term investing requires patience and discipline. That may not seem exciting, but it will pay off over time and you won't end up sending me e-mails bemoaning your losses.
Gordon Pape is editor of the Canada Report.
http://www.theglobeandmail.com/globe-investor/investment-ideas/four-ways-investors-go-wrong/article1730868/
Tuesday 21 December 2010
New year financial resolutions
New year financial resolutions
John Wasiliev
December 21, 2010 - 11:22AM
While the coming fortnight usually sees most people relax and enjoy the festive season, anyone who is taking a longer break could do worse that put some of this time towards a review of their investment strategy.
One reason why such reviews can be useful at this time of the year is because you can do something about a strategy that may not be going that well while there is still plenty of the financial year remaining.
The end of the calendar year is half way through a financial year so there is still six months of the 2010-11 financial year remaining. You can also come up with financial new year’s resolutions with the goal of implementing at least one that should improve your financial position.
For example you could make it a resolution that if you invest in shorter period term deposits that offer attractive returns that you still getting a good rate when the investment is rolled over. Banks have been known to invite investors to roll a deposit over for a 'similar term' without pointing out that same term does not necessarily mean the same higher interest rate.
Another thing you can do, suggests Elizabeth Moran, an analyst with fixed interest broker FIIG Securities, is reassess your appetite for taking risks with your money. Is it still the same as it was a year ago or have you become more pessimistic or optimistic?
Being more gloomy about the year ahead could suggest your tolerance for risk has lowered. Remaining optimistic on the other hand suggests you are happy with the present state of affairs. A question to ask is whether your state of mind is related to the state of your portfolio.
A useful strategy when conducting a review is to check your exposure to different types of investments – shares, property and income investments – and decide whether they are likely to satisfy your goals for the rest of the year.
Another consideration is to put any goals you have into perspective and maybe do things a bit differently.
A commentary in the current edition of the National Australia Bank's private wealth division’s newsletter highlights the importance of having goals. It also makes a very interesting observation about goals and investing.
It notes goals are often expressed with a single purpose in mind such as meeting certain future liabilities or expenses like paying for children’s education in 12 years’ time or retiring with a certain level of income at age But the reality is that people often have multiple goals with different time horizons as well as different priorities.
An alternative investment strategy is one that that recognises multiple goals, priorities and time horizons. It can involve having distinct investment portfolios for each goal with each portfolio evaluated on its ability to meet its objective.
Reflecting on the connection between an investment strategy and goals can be worthwhile at strategic times, such as the end of the calendar year, because it can be a period when people have the commodity many complain they are short of, namely the time to think about things. January is generally the quietest month of the year in financial markets, making it the most suitable time to spend considering your financial affairs.
By contrast, the end of the financial year around 30 June is often a rushed period. There is never a real break and most people are as busy in July and August as they are in May and June. At least over the Christmas-New Year summer holiday period, things do slow down to give you space to consider your financial future.
http://www.brisbanetimes.com.au/money/on-the-money/new-year-financial-resolutions-20101218-19172.html
John Wasiliev
December 21, 2010 - 11:22AM
While the coming fortnight usually sees most people relax and enjoy the festive season, anyone who is taking a longer break could do worse that put some of this time towards a review of their investment strategy.
One reason why such reviews can be useful at this time of the year is because you can do something about a strategy that may not be going that well while there is still plenty of the financial year remaining.
The end of the calendar year is half way through a financial year so there is still six months of the 2010-11 financial year remaining. You can also come up with financial new year’s resolutions with the goal of implementing at least one that should improve your financial position.
For example you could make it a resolution that if you invest in shorter period term deposits that offer attractive returns that you still getting a good rate when the investment is rolled over. Banks have been known to invite investors to roll a deposit over for a 'similar term' without pointing out that same term does not necessarily mean the same higher interest rate.
Another thing you can do, suggests Elizabeth Moran, an analyst with fixed interest broker FIIG Securities, is reassess your appetite for taking risks with your money. Is it still the same as it was a year ago or have you become more pessimistic or optimistic?
Being more gloomy about the year ahead could suggest your tolerance for risk has lowered. Remaining optimistic on the other hand suggests you are happy with the present state of affairs. A question to ask is whether your state of mind is related to the state of your portfolio.
A useful strategy when conducting a review is to check your exposure to different types of investments – shares, property and income investments – and decide whether they are likely to satisfy your goals for the rest of the year.
Another consideration is to put any goals you have into perspective and maybe do things a bit differently.
A commentary in the current edition of the National Australia Bank's private wealth division’s newsletter highlights the importance of having goals. It also makes a very interesting observation about goals and investing.
It notes goals are often expressed with a single purpose in mind such as meeting certain future liabilities or expenses like paying for children’s education in 12 years’ time or retiring with a certain level of income at age But the reality is that people often have multiple goals with different time horizons as well as different priorities.
An alternative investment strategy is one that that recognises multiple goals, priorities and time horizons. It can involve having distinct investment portfolios for each goal with each portfolio evaluated on its ability to meet its objective.
Reflecting on the connection between an investment strategy and goals can be worthwhile at strategic times, such as the end of the calendar year, because it can be a period when people have the commodity many complain they are short of, namely the time to think about things. January is generally the quietest month of the year in financial markets, making it the most suitable time to spend considering your financial affairs.
By contrast, the end of the financial year around 30 June is often a rushed period. There is never a real break and most people are as busy in July and August as they are in May and June. At least over the Christmas-New Year summer holiday period, things do slow down to give you space to consider your financial future.
http://www.brisbanetimes.com.au/money/on-the-money/new-year-financial-resolutions-20101218-19172.html
Tuesday 7 December 2010
DISCOVER the key to long term financial success – through asset allocation.
Finding the right solution
by HWANGDBS Column. Posted on November 20, 2010, Saturday
DISCOVER the key to long term financial success – through asset allocation.
Asset allocation seeks to find the optimal investment mix while minimising your risks to help you achieve your goals. It allows you to spread your money across the asset classes – shares, bonds, Exchange Traded Funds (ETFs), commodities, property and cash to name a few, as different assets behave differently under different economic environments.
Ideally, both asset allocation and diversifying your investments should be done with meaningful returns and not for the sake of diversifying as it may dilute your returns. Portfolio rebalancing is needed, at least, on an annual basis to ensure everything is on track.
The asset allocation that works best for you at any given point in your life will depend largely on your time horizon and your ability to tolerate risk. Your goal should be to maximise your return for the amount of risk that you are comfortable accepting. To help you do that, you need a well allocated and diversified portfolio. Asset allocation can help you:
1.Ensure consistent returns over time. You’ll improve your chances of participating in market gains and potentially reduce the impact of poor performing asset categories by investing in several asset classes.
2. Reduce overall risk. Through portfolio diversification you can limit the volatility in your portfolio while improving its performance, by spreading the risk among different types of securities that don’t always behave the same.
3. Move forward towards attaining your goals. A well-allocated portfolio can reduce the need to constantly adjust investment positions in order to chase market trends.
Sorting out which works best
It’s important that your investments are allocated over a variety of asset classes as each asset class performs differently over time due to its unique balance of risk and reward. Over time and through your different life stages, the various investments in your portfolio may alter in value, due to changing market conditions.
Rebalance it regularly to effectively pursue your financial goals. This could mean realising your gains on portions of your investments or cutting your losses on others. The funds can then be used to purchase other assets in order to bring your portfolio back on track annually.
Discover your type
Which type of investor are you? Check out these categories on www.hdbsim.com.my
• The young and the restless. Managing your finances at such an early stage will allow you to reap the rewards of long-term planning, enabling you to comfortably afford things that are important to you like a new home, further education, or even a baby.
• Wonder women sexy, savvy and successful. You pride yourself on your accomplishments and there is no doubting your purchasing power. You understand that investing smartly is the key to reaching one of your ultimate goals: financial freedom.
• The family way planning and informed financial decisions requires time, effort and patience as well as access to the best investment solutions that will be the foundation for your family’s financial stability.
• Top of the hill. You are no stranger to investment risk. Your keen insight and uncanny judgment have brought you to where you are today. Isn’t it time you get everything you want?
• The golden years. Now that you are financially liberated and free of the encumbrances of your career, you can indulge in the things you love the most… but that is assuming you planned well for your retirement.
This article is brought to you by HwangDBS Investment Management
http://www.theborneopost.com/?p=76157
by HWANGDBS Column. Posted on November 20, 2010, Saturday
DISCOVER the key to long term financial success – through asset allocation.
Asset allocation seeks to find the optimal investment mix while minimising your risks to help you achieve your goals. It allows you to spread your money across the asset classes – shares, bonds, Exchange Traded Funds (ETFs), commodities, property and cash to name a few, as different assets behave differently under different economic environments.
Ideally, both asset allocation and diversifying your investments should be done with meaningful returns and not for the sake of diversifying as it may dilute your returns. Portfolio rebalancing is needed, at least, on an annual basis to ensure everything is on track.
The asset allocation that works best for you at any given point in your life will depend largely on your time horizon and your ability to tolerate risk. Your goal should be to maximise your return for the amount of risk that you are comfortable accepting. To help you do that, you need a well allocated and diversified portfolio. Asset allocation can help you:
1.Ensure consistent returns over time. You’ll improve your chances of participating in market gains and potentially reduce the impact of poor performing asset categories by investing in several asset classes.
2. Reduce overall risk. Through portfolio diversification you can limit the volatility in your portfolio while improving its performance, by spreading the risk among different types of securities that don’t always behave the same.
3. Move forward towards attaining your goals. A well-allocated portfolio can reduce the need to constantly adjust investment positions in order to chase market trends.
Sorting out which works best
It’s important that your investments are allocated over a variety of asset classes as each asset class performs differently over time due to its unique balance of risk and reward. Over time and through your different life stages, the various investments in your portfolio may alter in value, due to changing market conditions.
Rebalance it regularly to effectively pursue your financial goals. This could mean realising your gains on portions of your investments or cutting your losses on others. The funds can then be used to purchase other assets in order to bring your portfolio back on track annually.
Discover your type
Which type of investor are you? Check out these categories on www.hdbsim.com.my
• The young and the restless. Managing your finances at such an early stage will allow you to reap the rewards of long-term planning, enabling you to comfortably afford things that are important to you like a new home, further education, or even a baby.
• Wonder women sexy, savvy and successful. You pride yourself on your accomplishments and there is no doubting your purchasing power. You understand that investing smartly is the key to reaching one of your ultimate goals: financial freedom.
• The family way planning and informed financial decisions requires time, effort and patience as well as access to the best investment solutions that will be the foundation for your family’s financial stability.
• Top of the hill. You are no stranger to investment risk. Your keen insight and uncanny judgment have brought you to where you are today. Isn’t it time you get everything you want?
• The golden years. Now that you are financially liberated and free of the encumbrances of your career, you can indulge in the things you love the most… but that is assuming you planned well for your retirement.
This article is brought to you by HwangDBS Investment Management
http://www.theborneopost.com/?p=76157
Friday 19 November 2010
The Mood of Investors
Airtime: Fri. Nov. 19 2010
Sharon Sager of UBS Private Wealth Management tells CNBC's Maria Bartiromo how she's developing strategies for clients who have become more conservative.
Related:
Why Retail Investors Still Avoid Stocks
Sunday 31 October 2010
Asset Allocation: Is it Necessary or Effective?
October 29th, 2009
http://www.financialiteracy.us/wordpress/2009/10/29/asset-allocation-is-it-necessary-or-effective/
http://www.financialiteracy.us/wordpress/2009/10/29/asset-allocation-is-it-necessary-or-effective/
Tuesday 17 August 2010
Your best Investment Method
What is Your best Investment Method?
Stocks Market
Bonds
Gold
Forex
Real Estates
Gold and Stocks Market
Stock and Bond
All of the Above!
None
Stocks Market
Bonds
Gold
Forex
Real Estates
Gold and Stocks Market
Stock and Bond
All of the Above!
None
Wednesday 11 August 2010
Introductory Lecture to The Investment Process
http://video.google.com/videoplay?docid=8694846935046925487&hl=en&emb=1#docid=6890486866020900949
Diversification, risk, asset classes, asset allocation, active and passive investment strategies, primary and secondary markets.
Bullbear Stock Investing Notes
Diversification, risk, asset classes, asset allocation, active and passive investment strategies, primary and secondary markets.
Bullbear Stock Investing Notes
Tuesday 27 July 2010
My 1st Million At 33 – yes, you can do it too
Asset Allocation Pyramid
Time frames and reliance on TA
In the pyramid diagram I labeled the progression in the reliance on technical analysis as the time frame (intended holding period) shortens. My short term trading is momentum based and generally has holding periods of days. On the other hand, the passive accounts are for buy-and-hold with annual rebalancing. The trench in the middle lies in between the extremes. The “income on steroids” group, PM and resource stocks I’m quite happy about holding long term (i.e. years), while others I may look at weekly charts for good entry and exit points so that the holding period may be months. Naturally, as reliance on TA wanes, reliance on fundamental and big-picture analysis waxes.
http://www.1stmillionat33.com/2007/06/new-portfolio-composition/
Time frames and reliance on TA
In the pyramid diagram I labeled the progression in the reliance on technical analysis as the time frame (intended holding period) shortens. My short term trading is momentum based and generally has holding periods of days. On the other hand, the passive accounts are for buy-and-hold with annual rebalancing. The trench in the middle lies in between the extremes. The “income on steroids” group, PM and resource stocks I’m quite happy about holding long term (i.e. years), while others I may look at weekly charts for good entry and exit points so that the holding period may be months. Naturally, as reliance on TA wanes, reliance on fundamental and big-picture analysis waxes.
http://www.1stmillionat33.com/2007/06/new-portfolio-composition/
Wednesday 21 July 2010
How this investor continues to maintain a portfolio of highly under-priced companies
Old School Value Stock Portfolio Performance: Highlight On General Growth Properties Inc,
Dec. 03, 2009
In November, the Old School Value portfolio ended up 18.6% compared to the market 5.4%. The absolute return since inception is now 40.87% compared to -1.26% for the market.
YTD, I am finally above 200% but I’m more keen on continuing to maintain a portfolio of highly under-priced companies.
PDII on the other hand has been going down without much news and since I like the business model and still believe it is very cheap, I’ll continue to keep it. My margin of safety applied to the buy price is what makes this position still +20%.
The big gainers this month were GGWPQ and SALM.
Distressed opportunities, i.e. bankruptcies, turnarounds, unfairly beaten stocks, are one of the most profitable investments one can make provided you buy when there is panic. GGWPQ has now overtaken my VVTV stake as the highest gainer at 1239% while VVTV is running second on 958%. SALM isn’t too shabby at330%.
One of the golden rules of retail being, it is much easier to sell to an existing customer than a new one, if the shopping experience was pleasant, I wouldn’t be surprised to see VVTV’s online presence continue to grow.
Their new credit facility is another good sign as it provides cash.
Knowing that these companies were throwing off big chunks of FCF, they were able to pay down debt aggressively from their organically generated cash from operations and keep up with their payments.
SALM has gone ahead and done better as the company was able to successfully tender their “old notes” which were due 2010. The new notes are due 2016 which positions them to focus on the business and provides room to breathe. They also received a credit upgrade which will only help with future borrowings.
These distressed/turnaround/cheap stocks remind me of David Dremen’s rule no.12
1. Bought more INSM
After reviewing the quarterly report and financial statements for the 3rd quarter, things look to be going pretty good at the company. They’ve been paying back debt and cash burn isn’t a worry at this point.
I’ll just have to continue waiting to see what their strategic plan is. I wish they would just decide what they plan to do and stop paying their financial advisors.
2. Sold KTII @ $101.39 for a 87% gain
My latest review of the company as I went through the 2009 best small companies list showed that the latest figures indicate KTII is worth around $125. My mistake for not reviewing my investment. I watching to see if it goes back down to the $80 range where I can hopefully pick a new entry point. Intrinsic value just seems to steadily increase.
Although growth is planned to come from acquisitions, they haven’t made any moves for a while so I believe that they are always concentrating on the business and looking for the best possible decision without wasting our shareholder’s equity.
3. Sold a little over half of my position in SALM @ $3.95 for roughly 220% gain.
Sold it as I believed it was very close to my intrinsic value but volume was very thin so I wasted about $40 on commission because I didn’t know orders were considered new again even if you use the “until canceled” option.
4. Bought BOLT
Missed my original entry point by a couple of cents but just increased the order a few percentage points and locked in my new position.
Solid company with strong fundamentals and history. A niche player that reminded me of KTII. It’s currently in an industry wide down cycle and unduly punished to a great entry for value investing.
I originally mentioned the idea in the value stock picks section of the value investing forum.
5. Cash slightly reduced to 21%
Jae Jun
Old School Value.
http://www.gurufocus.com/news.php?id=77922
Dec. 03, 2009
In November, the Old School Value portfolio ended up 18.6% compared to the market 5.4%. The absolute return since inception is now 40.87% compared to -1.26% for the market.
YTD, I am finally above 200% but I’m more keen on continuing to maintain a portfolio of highly under-priced companies.
Portfolio Movers
Big movers in November were DISK and PDII which moved about 25% in the wrong direction. DISK really is a dog, and I want to just sell it but it’s so small that the commission makes up about 5%. Although it’s probably one of my worst ideas, at least my asset allocation was correct and I haven’t lost much.PDII on the other hand has been going down without much news and since I like the business model and still believe it is very cheap, I’ll continue to keep it. My margin of safety applied to the buy price is what makes this position still +20%.
The big gainers this month were GGWPQ and SALM.
Distressed opportunities, i.e. bankruptcies, turnarounds, unfairly beaten stocks, are one of the most profitable investments one can make provided you buy when there is panic. GGWPQ has now overtaken my VVTV stake as the highest gainer at 1239% while VVTV is running second on 958%. SALM isn’t too shabby at330%.
General Growth Properties, Inc (GGWPQ)
News spread that Simon Property Group hired a financial advisory firm to look into buying GGWPQ properties and more news that the debt restructuring looks to close early and on possibility good terms gave the price a good bounce not far below $7.
ValueVision Media, Inc. (VVTV)
There hasn’t been huge news on VVTV yet but their latest quarterly report showed that they are increasing the conversion rate of visitors into customers. As a person that runs a retail operation, the ultimate goal is conversion. You could get huge amounts of traffic but if it amounts to no sales, it’s useless. With the Black Friday Thanksgiving sale here in the U.S. and the now popular “Cyber Monday” VVTV increased traffic, conversions and customers.
One of the golden rules of retail being, it is much easier to sell to an existing customer than a new one, if the shopping experience was pleasant, I wouldn’t be surprised to see VVTV’s online presence continue to grow.
Their new credit facility is another good sign as it provides cash.
Salem Communications Corp (SALM)
I place SALM along with all of my radio stocks in the distressed pile because they were under immense pressure in 2008 with the lack of credit available to refinance their debt but things sure have changed.
Knowing that these companies were throwing off big chunks of FCF, they were able to pay down debt aggressively from their organically generated cash from operations and keep up with their payments.
SALM has gone ahead and done better as the company was able to successfully tender their “old notes” which were due 2010. The new notes are due 2016 which positions them to focus on the business and provides room to breathe. They also received a credit upgrade which will only help with future borrowings.
These distressed/turnaround/cheap stocks remind me of David Dremen’s rule no.12
Rule 12: (A) Surprises, as a group, improve the performance of out-of-favor stocks, while impairing the performance of favorites.
(B) Positive surprises result in major appreciation for out-of-favor stocks, while having minimal impact on favorites.
(C) Negative surprises result in major drops in the price of favorites, while having virtually no impact on out-of-favor stocks.
(D) The effect of an earnings surprise continues for an extended pe riod of time.
Portfolio Trades
More selling than buying in November.1. Bought more INSM
After reviewing the quarterly report and financial statements for the 3rd quarter, things look to be going pretty good at the company. They’ve been paying back debt and cash burn isn’t a worry at this point.
I’ll just have to continue waiting to see what their strategic plan is. I wish they would just decide what they plan to do and stop paying their financial advisors.
2. Sold KTII @ $101.39 for a 87% gain
My latest review of the company as I went through the 2009 best small companies list showed that the latest figures indicate KTII is worth around $125. My mistake for not reviewing my investment. I watching to see if it goes back down to the $80 range where I can hopefully pick a new entry point. Intrinsic value just seems to steadily increase.
Although growth is planned to come from acquisitions, they haven’t made any moves for a while so I believe that they are always concentrating on the business and looking for the best possible decision without wasting our shareholder’s equity.
3. Sold a little over half of my position in SALM @ $3.95 for roughly 220% gain.
Sold it as I believed it was very close to my intrinsic value but volume was very thin so I wasted about $40 on commission because I didn’t know orders were considered new again even if you use the “until canceled” option.
4. Bought BOLT
Missed my original entry point by a couple of cents but just increased the order a few percentage points and locked in my new position.
Solid company with strong fundamentals and history. A niche player that reminded me of KTII. It’s currently in an industry wide down cycle and unduly punished to a great entry for value investing.
I originally mentioned the idea in the value stock picks section of the value investing forum.
5. Cash slightly reduced to 21%
Disclosure
I hold all stocks mentioned except sold positions.Jae Jun
Old School Value.
http://www.gurufocus.com/news.php?id=77922
Friday 2 July 2010
Do not scoff at an Overall Rate of Return of 8% p.a. of your TOTAL portfolio
Asset allocation is the next most important factor, after asset selection, in determining the overall rate of return of your total portfolio.
Asset Allocation and Overall Rate of Portfolio Return (Equity Growth Rate of 20%)
http://spreadsheets.google.com/ccc?key=0AuRRzs61sKqRdE9yeVRvSzRrMzM5djc0MHA0cERLbXc&hl=en
It is common enough to hear of 'investors' and 'speculators' achieving high rate of return on their equity/equities. An equity portion may give a return of >15% or >50% p.a., but this may only translate into a small overall return to the total portfolio if the percentage of equity is a small portion of the total portfolio.
Here are some illustrations to bring home this important fact.
Asset Allocation and Overall Rate of Portfolio Return (Equity Growth Rate of 8%)
Asset Allocation and Overall Rate of Portfolio Return (Equity Growth Rate of 10%)
Asset Allocation and Overall Rate of Portfolio Return (Equity Growth Rate of 15%)
Asset Allocation and Overall Rate of Portfolio Return (Equity Growth Rate of 20%)
http://spreadsheets.google.com/ccc?key=0AuRRzs61sKqRdE9yeVRvSzRrMzM5djc0MHA0cERLbXc&hl=en
Asset Allocation and Overall Rate of Portfolio Return (Equity Growth Rate of -10%)
It is common enough to hear of 'investors' and 'speculators' achieving high rate of return on their equity/equities. An equity portion may give a return of >15% or >50% p.a., but this may only translate into a small overall return to the total portfolio if the percentage of equity is a small portion of the total portfolio.
Therefore, do not scoff at the investor who is able to grow his/her total portfolio at an overall rate of return of 8% or more p.a. It is no mean feat indeed. Just study the spreadsheets to gauge what is required to achieve this.
On occasions, there are those who are 100% in cash. This doesn't make sense, as the risk of being in 100% cash compared to being 80% cash: 20% equity is almost the same and moreover, the later has a greater probability of a higher return compared to the former.
Thursday 1 July 2010
Asset Allocation and Rebalancing
Asset allocation and re-balancing is the second most important thing determining your portfolio returns after asset selection.
http://www.iwillteachyoutoberich.com/blog/asset-allocation-investor-psychology/#
Thursday 24 June 2010
World's rich got richer despite recession
World's rich got richer despite recession
June 23, 2010
The rich grew richer last year, even as the world endured the worst recession in decades.
A stock market rebound helped the world's ranks of millionaires climb 17 percent to 10 million, while their collective wealth surged 19 percent to $US 39 trillion, nearly recouping losses from the financial crisis, according to the latest Merrill Lynch-Capgemini world wealth report.
Stock values rose by half, while hedge funds recovered most of their 2008 losses, in a year marked by government stimulus spending and central bank easing.
"We are already seeing distinct signs of recovery and, in some areas, a complete return to 2007 levels of wealth and growth," Bank of America Corp wealth management chief Sallie Krawcheck said.
The fastest growth in wealth took place in India, China and Brazil, some of the hardest hit markets in 2008. Wealth in Latin America and the Asia-Pacific soared to record highs.
Asia's millionaire ranks rose to 3 million, matching Europe for the first time, paced by a 4.5 percent economic expansion.
Asian millionaires' combined wealth surged 31 percent to $US 9.7 trillion, surpassing Europe's $US 9.5 trillion.
In North America, the ranks of the rich rose 17 percent and their wealth grew 18 percent to $US 10.7 trillion.
The United States was home to the most millionaires in 2009 - 2.87 million - followed by Japan with 1.65 million, Germany with 861,000, and China with 477,000.
Switzerland had the highest concentration of millionaires: nearly 35 for every 1000 adults.
Yet as portfolios bounced back, investors remained wary after a collapse that erased a decade of stock gains, fueled a contraction in the global economy and sent unemployment soaring.
The report, based on surveys with more than 1100 wealthy investors with 23 firms, found that the rich were well served by holding a broad range of investments, including commodities and real estate.
"The wealthy allocated, as opposed to concentrated, their investments," Merrill Lynch head of U.S. wealth management Lyle LaMothe said in an interview.
Millionaires poured more of their money into fixed-income investments seeking predictable returns and cash flow. The challenge ahead for brokers is convincing clients to move off the sidelines and pursue riskier, more fruitful investments.
"There is still a hesitancy," LaMothe said. "Liquidity is incredibly important and people need cash flow to preserve their lifestyle - but they want to replace that cash flow in a way that does not increase their risk profile."
The report found that investor confidence in advisers and regulators remains shaken. The rich are actively managing their investments, seeking customised advice and demanding full disclosure about the securities they buy.
There were signs that investors were shaking off their concerns. Families that kept money closer to home during the crisis began shifting money to foreign markets, particularly the developing nations.
North American and European investors are expected to increase their exposure to Asian markets, which are projected to lead the world in economic expansion. Europe's wealthy are seen increasing their US and Canadian holdings.
More wealthy clients also are taking a harder look at large companies that pay healthy dividends, as an alternative to bonds and their razor-thin yields.
"Investors are open to areas they hadn't thought about before as they try to preserve their ability to be philanthropic, to preserve their lifestyle," LaMothe said. "To me, the report underscored clients are involved and they're not inclined to stay in 1 percent savings accounts."
Reuters
June 23, 2010
The rich grew richer last year, even as the world endured the worst recession in decades.
A stock market rebound helped the world's ranks of millionaires climb 17 percent to 10 million, while their collective wealth surged 19 percent to $US 39 trillion, nearly recouping losses from the financial crisis, according to the latest Merrill Lynch-Capgemini world wealth report.
Stock values rose by half, while hedge funds recovered most of their 2008 losses, in a year marked by government stimulus spending and central bank easing.
"We are already seeing distinct signs of recovery and, in some areas, a complete return to 2007 levels of wealth and growth," Bank of America Corp wealth management chief Sallie Krawcheck said.
The fastest growth in wealth took place in India, China and Brazil, some of the hardest hit markets in 2008. Wealth in Latin America and the Asia-Pacific soared to record highs.
Asia's millionaire ranks rose to 3 million, matching Europe for the first time, paced by a 4.5 percent economic expansion.
Asian millionaires' combined wealth surged 31 percent to $US 9.7 trillion, surpassing Europe's $US 9.5 trillion.
In North America, the ranks of the rich rose 17 percent and their wealth grew 18 percent to $US 10.7 trillion.
The United States was home to the most millionaires in 2009 - 2.87 million - followed by Japan with 1.65 million, Germany with 861,000, and China with 477,000.
Switzerland had the highest concentration of millionaires: nearly 35 for every 1000 adults.
Yet as portfolios bounced back, investors remained wary after a collapse that erased a decade of stock gains, fueled a contraction in the global economy and sent unemployment soaring.
The report, based on surveys with more than 1100 wealthy investors with 23 firms, found that the rich were well served by holding a broad range of investments, including commodities and real estate.
"The wealthy allocated, as opposed to concentrated, their investments," Merrill Lynch head of U.S. wealth management Lyle LaMothe said in an interview.
Millionaires poured more of their money into fixed-income investments seeking predictable returns and cash flow. The challenge ahead for brokers is convincing clients to move off the sidelines and pursue riskier, more fruitful investments.
"There is still a hesitancy," LaMothe said. "Liquidity is incredibly important and people need cash flow to preserve their lifestyle - but they want to replace that cash flow in a way that does not increase their risk profile."
The report found that investor confidence in advisers and regulators remains shaken. The rich are actively managing their investments, seeking customised advice and demanding full disclosure about the securities they buy.
There were signs that investors were shaking off their concerns. Families that kept money closer to home during the crisis began shifting money to foreign markets, particularly the developing nations.
North American and European investors are expected to increase their exposure to Asian markets, which are projected to lead the world in economic expansion. Europe's wealthy are seen increasing their US and Canadian holdings.
More wealthy clients also are taking a harder look at large companies that pay healthy dividends, as an alternative to bonds and their razor-thin yields.
"Investors are open to areas they hadn't thought about before as they try to preserve their ability to be philanthropic, to preserve their lifestyle," LaMothe said. "To me, the report underscored clients are involved and they're not inclined to stay in 1 percent savings accounts."
Reuters
Saturday 29 May 2010
Chuck Schwab Is Worried About Small Investors. Should We Worry Too?
COVER STORY May 27, 2010, 5:00PM EST
Chuck Schwab Is Worried About Small Investors. Should We Worry Too?
"People are still in a state of fear," says the father of individual investing. "And with good reason." Schwab believes it is crucial for the little guy to stay invested. And his business depends on it
In 12 years as a retail financial consultant for Charles Schwab (SCH), George Pennock thought he had seen every kind of market. Then, on May 6, he and his 250 clients lived through something new. Pennock was in Schwab's office in Englewood, Colo., just outside of Denver, talking by phone with a retiree who moved his money to Schwab last year because he says he felt suckered by his old broker. While they spoke, Pennock kept an eye on his computer screen and saw the Dow drop 250 points, bounce sideways, then go into free fall—300, 400, 900 points down. His client was watching the same thing on CNBC.
"What's going on, George?" the retiree asked. "Do you have any explanation for this?" Pennock didn't. He was thinking he should end the call and contact clients who had pulled out of equities after getting clobbered in 2008 and 2009. Some left at the bottom, then sat on the sidelines while the market raced up 80 percent. Maybe they would see this as a buying opportunity.
He never got the chance. In minutes, the market anomaly was over and the Dow was heading back up. It wasn't until the next day that Pennock, 37, began to appreciate its impact on investor psychology. He arrived at his office the morning after to find 22 phone messages. By day's end he had 50—one-fifth of his client base. "A lot of the calls were nervous," he recalls. "It was, 'George, this is testing my risk tolerance.' They have deep-seated concerns that [the correction] will go on for a while and nobody knows how long or how bad it will be."
It took Pennock two weeks to catch up on all the calls. "These conversations are lengthy," he says. "They take a lot of hand-holding." Some clients wanted to retreat; he reminded them why they had made financial plans in the first place. A retired airline pilot wanted to know if the 30 percent of his assets invested in equities was too high. (Pennock assured him it wasn't.) Another investor, who had waited five months to get back into the market, worried he had missed his chance. Most simply wanted reassurance. The May 6 crash may have been a freak occurrence, but it felt like one more sign that the deck was stacked against the little guy. "They got burned very badly before," Pennock says, "and they don't ever want to be in that situation again."
Many small investors had only begun to tiptoe back into equities when the May 6 crash and the European credit crisis rocked the markets, completing a particularly cruel cycle. In the year prior—while the S&P 500 was rebounding 69 percent from its Mar. 9, 2009, bottom—individual investors withdrew a total of $11.5 billion from U.S. equity mutual funds and poured $506 billion into lower-yielding bond funds, according to TrimTabs Investment Research. By late spring, they had just begun to reverse course, venturing back into equities by channelling $13.9 billion into domestic mutual and ETF funds in March and $6.9 billion in April. By the third week of May, they'd withdrawn $29.3 million from U.S. equity mutual funds and poured an additional $8.2 billion into bonds. An American Association of Individual Investors survey taken the week of the May crash showed investor sentiment jumped to 36 percent "bearish," from 28 percent the week before. As of May 10, according to the Federal Reserve, money on the sidelines in bank and money market accounts had reached $9.36 trillion, compared to $7.44 trillion in May 2007.
The period since early 2008 "is the worst time since I began the company," says Charles Schwab, the father of the modern American individual investor. "These are the most violent markets. Most people are still in a state of fear. I'd say 98 percent are still very concerned. And for a lot of good reasons. Look at the headlines. You've got these scoundrels doing all this stuff. People wonder, 'Who can I trust?' "
Schwab is sitting in his San Francisco office—which has always been spare but these days seems downright spartan—looking out the window at the Bay Bridge and mulling the tortured psychology of the American investor. "Where are they?" he asks, then pauses and lets out a sigh. "This is the most violent period I've ever seen," he says finally. "It was the end of capitalism as we knew it. The whole definition of safety and soundness—what does it really mean any more?"
As chairman of the $4.2 billion company he founded in 1975, Schwab has reason to be worried about his customers. The success of his company depends in some measure on his financial advisers' ability to keep their clients engaged in the markets. Last year, almost a quarter of the company's revenue came from trading commissions; another 45 percent came from asset management fees. That's the tension at the heart of Schwab's enterprise. He has become the de facto therapist to the individual investor, but he is not a disinterested observer. His job—like Pennock and his other 6,868 licensed brokers—is to keep America invested. Schwab says that staying broadly diversified and firmly in the game remains the key to long-term financial security. Given what's going on in the world, should anyone believe him?
Schwab, now 72, and Vanguard Funds founder Jack Bogle are the old lions of the retail investment industry. Both played key roles in launching the golden age of individual investing—the period between August 1982 and March 2000 when the S&P 500 climbed from 102 to 1,527 and buy-and-hold seemed the surest path to security. Bogle was the pioneer of mutual funds and Schwab opened the door to equity trades for small investors. When Congress deregulated brokerage fees in 1975, some brokerage houses responded by raising fees; Schwab slashed his, making investing affordable for the middle class and becoming broker to the masses. His company's revenues grew from $387 million in 1990 to $5.8 billion in 2000. By then, it was offering round-the-clock trading, sophisticated investment analysis, and a mutual fund supermarket. Long before Starbucks (SBUX), Schwab's branches were gathering places for market enthusiasts—office workers, day traders, and loiterers who stopped by to check stock quotes, mull their next move, brag about their big scores, and indulge in a group fantasy about a spectacular new way to get rich.
As individual investing became a way of life, Schwab inevitably drew competitors—rival discount brokers (and, later, discount online brokers) such as Ameritrade (AMTD) and E*Trade (ETFC), and full-service houses such as Fidelity. Schwab's company rode the late-1990s tech boom but was battered by the steep drop in trading following the 2000 crash. Schwab himself moved out of the top job in 2003, only to move back in a year later, renewing the company's commitment to the small investor. (Today the chief executive officer is Walt Bettinger.) During the financial panic of 2008, Schwab attracted investors fleeing Merrill Lynch, Wachovia, E*Trade, and other battered firms. That new business helped boost Schwab's assets under management 25 percent to $1.4 trillion last year from the prior year (compared with $1.5 trillion at Fidelity, $350 billion at TD Ameritrade, and $162 billion at E*Trade) but Schwab's revenue fell 19 percent under pressure from low interest rates. The company's stock was trading around $16 last week, down $3 from one month before.
Since 1986, Schwab has written four books on investing. He is an optimist by nature, one who has always preached asset allocation, diversification, and investing for the long term. By empowering individual investors at the start of the bull market, he and Bogle and Fidelity's marquee investor Peter Lynch inadvertently created a monster. As playing the market became a national pastime, investing turned into a synonym for stockpicking. Equities were thought of as savings. Today, legions of investors are torn between a newfound desire for safety and the allure of old, bad habits.
Worse, as Americans became do-it-yourselfers and sometimes day traders, their success—especially during the inflating of the dot-com and real estate bubbles—masked a profound shift in the balance of power. Wealth was migrating to institutions, hedge funds, and investment banks like Goldman Sachs (GS), which had created proprietary desks to trade ever more esoteric instruments for their own accounts. Institutional investors now own about 70 percent of American corporations, up from 35 percent in 1975, according to Bogle. As trading algorithms grew more complex and computers sped up, every advantage went to the big guys.
The Yale School of Management has conducted a "buy on dips" survey since 1989, a confidence index that measures investors' willingness to buy after market drops of 3 percent or more. Institutional and individual investor sentiment tracked closely until 2007. At the height of the Dow Jones industrial average, in October 2007, 61 percent of each group said they would buy on dips. Since then they have diverged. By March 2010, 71.6 percent of institutional investors were willing to buy on dips compared to only 57.5 percent of individuals.
In other words, small investors need more help than ever. "Before, nobody needed advice—most just called me up to place their trades," says Robinson Martin, a financial consultant in Schwab's Cobb County (Ga.) office, on the outskirts of Atlanta. Now Martin and others are no longer cheerleaders and trade executors; they are psychologists, trauma experts, counselors, empathizers. It's a delicate balance. In pre-crash days, the company's clients were mostly avid investors. Rarely did Schwab have to coax them into the market. But that's what the company has to do now to prop up the assets it oversees. It's what it has to do to juice its own adviser business. It's what Charles Schwab has preached from the beginning—asset allocation over time. And it's what he does, as well. In August 2007, near the very top, he invested the more than $10 million he'd received from the company's sale of its U.S. Trust unit in a portfolio divided between 50 asset classes. Then he left it. After losing about 30 percent of its value at its lowest point, it is now down about 12 percent, he says. "I follow my own advice," he says. "I'm not running for the hills. Yes, those investments might be somewhat down from '07, but they will be at higher values next year or the year after. I don't know exactly when, but I believe it because of my confidence in the American economic system. If you don't have that confidence, then you definitely should not be a client of Schwab."
Atlanta is a buy-and-hold town, loyal to local favorites Coke, (KO) SunTrust Bank (STI), Delta Air Lines (DAL), and Home Depot (HD), says Martin, 38, as he prepares to conduct a client seminar on a sunny weekday at Schwab's Cobb branch. THe old rules don't work any more, he says. You can't buy and hold anything with confidence, and that's rattling even those who didn't follow the rules during the bull market.
Martin's conference room, inside a tall, glass-and-steel building in a suburban office park, feels like a relic of more prosperous times as a dozen strangers unwrap turkey and ham sandwiches and start talking about the markets. Most are retirees; three are doctors, one a former restaurant owner. They have come to get a market outlook that turns out to be cautiously optimistic. No matter. For nearly two hours, the conversation ricochets from one fear to another—mostly about what could blindside them next. Fannie and Freddie? Inflation? Government spending debasing currencies? "I look at what's happening in Greece, and I see us. I think that could happen here," says James Wood, an Atlanta neurosurgeon.
No one at the conference table knows what to believe anymore, and with good reason. "I had absolutely no idea how deeply the subprime mortgages had penetrated into the financial markets." says Dyckman Poland, a retired engineer. How are investors supposed to make informed decisions when they can't trust what's printed on corporate balance sheets, asks Dr. Wood. How much of the market is ruled by computer-generated trading anyway, another asks, "while you and I are just putting in our dribs and drabs? How do we individuals fit into all this?" Bob Bonacci, the vice-president of a business-services firm in nearby Kennesaw, looks around the table. "I think the majority of us are at or near retirement," he says. "We've taken a hit once, and now it looks like we're on the brink of another situation where it could all be taken away from us. For us, these mistakes are really going to count."
As the stock market fell toward the bottom in March 2009, Schwab distributed videos to its clients in which the founder tried to strike a reassuring tone. Just hang on, he urged. "We told them," Schwab says, "the world was not coming to an end." Yet just as they had after every market crash since 1987, investors fled to safety at the wrong moment, trading equities for cash and fixed income. "It is too darned bad," Schwab says. "So many people held on and held on and held on through 2008, and finally, by early 2009, they'd had enough. Then just at the wrong moment, they got to the pitch of emotion and they said, 'I've had enough.' And chucked it in and sold. Fear took over in the most extreme way." To steady their nerves, the company puts out books, seminars, articles, and the famous "Talk to Chuck" ads. "One of our chief roles is to try to help people through this thing," he says. "But we can't help people overcome the power of fear. Or the power of greed. Those are too much a part of human instinct. We are not psychiatrists."
Now, Schwab says, his biggest worry is that investors will miss out again. They have $2.98 trillion stashed in money market funds, according to TrimTabs, and lots more in CDs and savings accounts. "If you're not an investor, you get no return on your savings and you have this very difficult situation coming up in the next three to five years of inflation that will just take away whatever you might get in some kind of yield. My fear is that inflation will come back and people will throw up their hands and say: 'Jeez, I wish I'd done something to protect myself.' "
That may sound self-serving. Except that, barring a return to a raging bull market, Schwab stands to benefit more, at least in the short-term, if its clients stay paralyzed. If interest rates take off, as the company expects they will by next year, its earnings will soar. That's because Schwab began to change its business mix a decade ago. Foreseeing an end to the bull market and with it, a decline in trading volume, it reduced its dependence on trading to 24 percent of total revenue last year from about 40 percent in 2000. It increased its asset management business and added the Charles Schwab Bank, offering retail banking and mortgage services—thus turning itself into more of a discount investor-services firm than a mere brokerage. It derives much more of its revenue from fees for managing and administering assets (45 percent last year, vs. 27 percent in 2000) and net interest revenue from the cash in its bank and money market funds (29 percent last year, vs. 22 percent in 2000).
If Schwab had not waived the fees it charged on money market funds last year—a move Schwab ordered because their interest yield was so low—trading would have accounted for just 20 percent of last year's revenue and interest would have accounted for 32 percent. And if interest rates do head higher, a report by JPMorgan Chase (JPM) analyst Kenneth B. Worthington said this month, Schwab's earnings will react like a "coiled spring." As rates rise from 2010 to 2012, he predicts, Schwab's net income will more than double.
"We make little bits of money on everything, for the most part," says Schwab. "We are completely neutral about what you do. We would probably make more money on money that sits in a money market fund than on a stock you buy and hold. But we don't have an agenda. We really don't."
Yet the Schwab brand is not about making a killing by collecting interest on the money that clients have sitting in their accounts. The brand lives and dies by "Ask Chuck," as a place where befuddled investors go to not get screwed. And Schwab can't continue to be the "Trusted Advisor" if the client assets of its advisory business aren't growing. It's got to show that it's helping investors, and that means guiding them into vehicles that show growth, not stagnation. "Individual investors must understand asset allocation," says Schwab. "With just a few thousand dollars, you can get a little slice of this and a little slice of that—large caps, small caps, emerging markets, and then build on it," he says. The point is not to get in on the ground floor of the next Google (GOOG) and ride a juggernaut. "You're going to get maybe 5 to 10 percent per annum over 5 to 20 years—maybe 30. That's still pretty good."
The day after the Schwab seminar in Atlanta, one of its attendees, Gene Perkins, 66, returned to Robinson Martin's office. Though he has done his own investing since he sold his restaurant business three years ago, Perkins is now enlisting SChwab so he doesn't get burned, as he did in the 2008 crash when his investments lost 28 percent of their value. He and Martin are working on an asset allocation plan, and it's pretty tough going. Perkins' approach to investing is practically bipolar. At first, he presses Martin about the safest assets. "So what if you just buy treasuries and CDs?" Perkins asks. "Would it kill me to lose a little ground [to inflation] if it lets me sleep at night? It's all relative."
Within minutes, Perkins is trying to elicit a little stockpicking from Martin. That hybrid approach was a big winner during the long bull market. Even disciplined investors could dip in now and then, roll the dice and maybe make a windfall. "You're going to be mad at me for bringing this up," Perkins says. "But if the market tanks, there's going to be some good buys....Let's say the market closes down 80...I may be wrong, dead wrong, and I hope I am. But I got eight or nine stocks here...." He gestures to a hand-scrawled list: McDonald's (MCD), BP (BP), Altria (MO), Citi (C). He's got good arguments for each. "McDonald's is at $68—that's my business. If I can get it at $65, that's a good deal. And Citi...I can wait it out. If Citi is still at $4 a share four years from today, well then I deserve to lose money on that account."
Martin listens patiently and then shakes his head. "Gene, that's too much risk," he says. What will Perkins do with the gains? "Keep it in cash?" Perkins ventures. "Or wait till the market tanks again and buy some more deals?" Responds Martin: "Gene, that's head fakes. When the market tanks again, you will pull everything out. You are playing Vegas odds."
Perkins slumps back in his chair. "I just have a lot to make up. I can't afford to take another hit."
Martin continues calmly: "You said McDonald's and Citi, Gene, and that may well be. But what you're missing is a hedge. Asset allocation is your hedge. You started this conversation with capital preservation, and what capital preservation has to be is a balance between risk and growth. Ultimately what we're trying to do is get out of the guessing game."
Martin keeps trying, his bedside manner patient but firm. Once Perkins has a plan in place, his assets will be invested broadly across asset classes to mitigate his risk. What he has to decide is the balance between risk and reward. With a financial plan working for him, "it's all math at that point," explains Martin. The hard part for so many investors is having to constantly recalibrate the portfolio to keep the asset classes in line with each other. That means scaling back on—not rushing into—sectors that are growing fast. To individual investors who came of age in a bull market, it's all painfully counterintuitive.
Perkins has heard it all before. "Asset allocation is the opposite of market timing, I do understand that," he sighs. "You all have made that crystal clear." And then he gets to the heart of the matter, the reason these investing decisions are causing him so much agony. He has no heirs. He will begin drawing on his retirement funds at 70. "If I live to be 90...if I start drawing at 70, will there be enough?" The subprime crash was a huge setback, and now he doesn't know. "I don't need to have anything left over. I'd like to be broke when I'm dead. I don't even need a casket. As long as I have enough. I just don't want to run out before I die."
Morris is a Bloomberg Businessweek contributor.
http://www.businessweek.com/magazine/content/10_23/b4181058561674.htm
Chuck Schwab Is Worried About Small Investors. Should We Worry Too?
"People are still in a state of fear," says the father of individual investing. "And with good reason." Schwab believes it is crucial for the little guy to stay invested. And his business depends on it
In 12 years as a retail financial consultant for Charles Schwab (SCH), George Pennock thought he had seen every kind of market. Then, on May 6, he and his 250 clients lived through something new. Pennock was in Schwab's office in Englewood, Colo., just outside of Denver, talking by phone with a retiree who moved his money to Schwab last year because he says he felt suckered by his old broker. While they spoke, Pennock kept an eye on his computer screen and saw the Dow drop 250 points, bounce sideways, then go into free fall—300, 400, 900 points down. His client was watching the same thing on CNBC.
"What's going on, George?" the retiree asked. "Do you have any explanation for this?" Pennock didn't. He was thinking he should end the call and contact clients who had pulled out of equities after getting clobbered in 2008 and 2009. Some left at the bottom, then sat on the sidelines while the market raced up 80 percent. Maybe they would see this as a buying opportunity.
He never got the chance. In minutes, the market anomaly was over and the Dow was heading back up. It wasn't until the next day that Pennock, 37, began to appreciate its impact on investor psychology. He arrived at his office the morning after to find 22 phone messages. By day's end he had 50—one-fifth of his client base. "A lot of the calls were nervous," he recalls. "It was, 'George, this is testing my risk tolerance.' They have deep-seated concerns that [the correction] will go on for a while and nobody knows how long or how bad it will be."
It took Pennock two weeks to catch up on all the calls. "These conversations are lengthy," he says. "They take a lot of hand-holding." Some clients wanted to retreat; he reminded them why they had made financial plans in the first place. A retired airline pilot wanted to know if the 30 percent of his assets invested in equities was too high. (Pennock assured him it wasn't.) Another investor, who had waited five months to get back into the market, worried he had missed his chance. Most simply wanted reassurance. The May 6 crash may have been a freak occurrence, but it felt like one more sign that the deck was stacked against the little guy. "They got burned very badly before," Pennock says, "and they don't ever want to be in that situation again."
Many small investors had only begun to tiptoe back into equities when the May 6 crash and the European credit crisis rocked the markets, completing a particularly cruel cycle. In the year prior—while the S&P 500 was rebounding 69 percent from its Mar. 9, 2009, bottom—individual investors withdrew a total of $11.5 billion from U.S. equity mutual funds and poured $506 billion into lower-yielding bond funds, according to TrimTabs Investment Research. By late spring, they had just begun to reverse course, venturing back into equities by channelling $13.9 billion into domestic mutual and ETF funds in March and $6.9 billion in April. By the third week of May, they'd withdrawn $29.3 million from U.S. equity mutual funds and poured an additional $8.2 billion into bonds. An American Association of Individual Investors survey taken the week of the May crash showed investor sentiment jumped to 36 percent "bearish," from 28 percent the week before. As of May 10, according to the Federal Reserve, money on the sidelines in bank and money market accounts had reached $9.36 trillion, compared to $7.44 trillion in May 2007.
The period since early 2008 "is the worst time since I began the company," says Charles Schwab, the father of the modern American individual investor. "These are the most violent markets. Most people are still in a state of fear. I'd say 98 percent are still very concerned. And for a lot of good reasons. Look at the headlines. You've got these scoundrels doing all this stuff. People wonder, 'Who can I trust?' "
Schwab is sitting in his San Francisco office—which has always been spare but these days seems downright spartan—looking out the window at the Bay Bridge and mulling the tortured psychology of the American investor. "Where are they?" he asks, then pauses and lets out a sigh. "This is the most violent period I've ever seen," he says finally. "It was the end of capitalism as we knew it. The whole definition of safety and soundness—what does it really mean any more?"
As chairman of the $4.2 billion company he founded in 1975, Schwab has reason to be worried about his customers. The success of his company depends in some measure on his financial advisers' ability to keep their clients engaged in the markets. Last year, almost a quarter of the company's revenue came from trading commissions; another 45 percent came from asset management fees. That's the tension at the heart of Schwab's enterprise. He has become the de facto therapist to the individual investor, but he is not a disinterested observer. His job—like Pennock and his other 6,868 licensed brokers—is to keep America invested. Schwab says that staying broadly diversified and firmly in the game remains the key to long-term financial security. Given what's going on in the world, should anyone believe him?
Schwab, now 72, and Vanguard Funds founder Jack Bogle are the old lions of the retail investment industry. Both played key roles in launching the golden age of individual investing—the period between August 1982 and March 2000 when the S&P 500 climbed from 102 to 1,527 and buy-and-hold seemed the surest path to security. Bogle was the pioneer of mutual funds and Schwab opened the door to equity trades for small investors. When Congress deregulated brokerage fees in 1975, some brokerage houses responded by raising fees; Schwab slashed his, making investing affordable for the middle class and becoming broker to the masses. His company's revenues grew from $387 million in 1990 to $5.8 billion in 2000. By then, it was offering round-the-clock trading, sophisticated investment analysis, and a mutual fund supermarket. Long before Starbucks (SBUX), Schwab's branches were gathering places for market enthusiasts—office workers, day traders, and loiterers who stopped by to check stock quotes, mull their next move, brag about their big scores, and indulge in a group fantasy about a spectacular new way to get rich.
As individual investing became a way of life, Schwab inevitably drew competitors—rival discount brokers (and, later, discount online brokers) such as Ameritrade (AMTD) and E*Trade (ETFC), and full-service houses such as Fidelity. Schwab's company rode the late-1990s tech boom but was battered by the steep drop in trading following the 2000 crash. Schwab himself moved out of the top job in 2003, only to move back in a year later, renewing the company's commitment to the small investor. (Today the chief executive officer is Walt Bettinger.) During the financial panic of 2008, Schwab attracted investors fleeing Merrill Lynch, Wachovia, E*Trade, and other battered firms. That new business helped boost Schwab's assets under management 25 percent to $1.4 trillion last year from the prior year (compared with $1.5 trillion at Fidelity, $350 billion at TD Ameritrade, and $162 billion at E*Trade) but Schwab's revenue fell 19 percent under pressure from low interest rates. The company's stock was trading around $16 last week, down $3 from one month before.
Since 1986, Schwab has written four books on investing. He is an optimist by nature, one who has always preached asset allocation, diversification, and investing for the long term. By empowering individual investors at the start of the bull market, he and Bogle and Fidelity's marquee investor Peter Lynch inadvertently created a monster. As playing the market became a national pastime, investing turned into a synonym for stockpicking. Equities were thought of as savings. Today, legions of investors are torn between a newfound desire for safety and the allure of old, bad habits.
Worse, as Americans became do-it-yourselfers and sometimes day traders, their success—especially during the inflating of the dot-com and real estate bubbles—masked a profound shift in the balance of power. Wealth was migrating to institutions, hedge funds, and investment banks like Goldman Sachs (GS), which had created proprietary desks to trade ever more esoteric instruments for their own accounts. Institutional investors now own about 70 percent of American corporations, up from 35 percent in 1975, according to Bogle. As trading algorithms grew more complex and computers sped up, every advantage went to the big guys.
The Yale School of Management has conducted a "buy on dips" survey since 1989, a confidence index that measures investors' willingness to buy after market drops of 3 percent or more. Institutional and individual investor sentiment tracked closely until 2007. At the height of the Dow Jones industrial average, in October 2007, 61 percent of each group said they would buy on dips. Since then they have diverged. By March 2010, 71.6 percent of institutional investors were willing to buy on dips compared to only 57.5 percent of individuals.
In other words, small investors need more help than ever. "Before, nobody needed advice—most just called me up to place their trades," says Robinson Martin, a financial consultant in Schwab's Cobb County (Ga.) office, on the outskirts of Atlanta. Now Martin and others are no longer cheerleaders and trade executors; they are psychologists, trauma experts, counselors, empathizers. It's a delicate balance. In pre-crash days, the company's clients were mostly avid investors. Rarely did Schwab have to coax them into the market. But that's what the company has to do now to prop up the assets it oversees. It's what it has to do to juice its own adviser business. It's what Charles Schwab has preached from the beginning—asset allocation over time. And it's what he does, as well. In August 2007, near the very top, he invested the more than $10 million he'd received from the company's sale of its U.S. Trust unit in a portfolio divided between 50 asset classes. Then he left it. After losing about 30 percent of its value at its lowest point, it is now down about 12 percent, he says. "I follow my own advice," he says. "I'm not running for the hills. Yes, those investments might be somewhat down from '07, but they will be at higher values next year or the year after. I don't know exactly when, but I believe it because of my confidence in the American economic system. If you don't have that confidence, then you definitely should not be a client of Schwab."
Atlanta is a buy-and-hold town, loyal to local favorites Coke, (KO) SunTrust Bank (STI), Delta Air Lines (DAL), and Home Depot (HD), says Martin, 38, as he prepares to conduct a client seminar on a sunny weekday at Schwab's Cobb branch. THe old rules don't work any more, he says. You can't buy and hold anything with confidence, and that's rattling even those who didn't follow the rules during the bull market.
Martin's conference room, inside a tall, glass-and-steel building in a suburban office park, feels like a relic of more prosperous times as a dozen strangers unwrap turkey and ham sandwiches and start talking about the markets. Most are retirees; three are doctors, one a former restaurant owner. They have come to get a market outlook that turns out to be cautiously optimistic. No matter. For nearly two hours, the conversation ricochets from one fear to another—mostly about what could blindside them next. Fannie and Freddie? Inflation? Government spending debasing currencies? "I look at what's happening in Greece, and I see us. I think that could happen here," says James Wood, an Atlanta neurosurgeon.
No one at the conference table knows what to believe anymore, and with good reason. "I had absolutely no idea how deeply the subprime mortgages had penetrated into the financial markets." says Dyckman Poland, a retired engineer. How are investors supposed to make informed decisions when they can't trust what's printed on corporate balance sheets, asks Dr. Wood. How much of the market is ruled by computer-generated trading anyway, another asks, "while you and I are just putting in our dribs and drabs? How do we individuals fit into all this?" Bob Bonacci, the vice-president of a business-services firm in nearby Kennesaw, looks around the table. "I think the majority of us are at or near retirement," he says. "We've taken a hit once, and now it looks like we're on the brink of another situation where it could all be taken away from us. For us, these mistakes are really going to count."
As the stock market fell toward the bottom in March 2009, Schwab distributed videos to its clients in which the founder tried to strike a reassuring tone. Just hang on, he urged. "We told them," Schwab says, "the world was not coming to an end." Yet just as they had after every market crash since 1987, investors fled to safety at the wrong moment, trading equities for cash and fixed income. "It is too darned bad," Schwab says. "So many people held on and held on and held on through 2008, and finally, by early 2009, they'd had enough. Then just at the wrong moment, they got to the pitch of emotion and they said, 'I've had enough.' And chucked it in and sold. Fear took over in the most extreme way." To steady their nerves, the company puts out books, seminars, articles, and the famous "Talk to Chuck" ads. "One of our chief roles is to try to help people through this thing," he says. "But we can't help people overcome the power of fear. Or the power of greed. Those are too much a part of human instinct. We are not psychiatrists."
Now, Schwab says, his biggest worry is that investors will miss out again. They have $2.98 trillion stashed in money market funds, according to TrimTabs, and lots more in CDs and savings accounts. "If you're not an investor, you get no return on your savings and you have this very difficult situation coming up in the next three to five years of inflation that will just take away whatever you might get in some kind of yield. My fear is that inflation will come back and people will throw up their hands and say: 'Jeez, I wish I'd done something to protect myself.' "
That may sound self-serving. Except that, barring a return to a raging bull market, Schwab stands to benefit more, at least in the short-term, if its clients stay paralyzed. If interest rates take off, as the company expects they will by next year, its earnings will soar. That's because Schwab began to change its business mix a decade ago. Foreseeing an end to the bull market and with it, a decline in trading volume, it reduced its dependence on trading to 24 percent of total revenue last year from about 40 percent in 2000. It increased its asset management business and added the Charles Schwab Bank, offering retail banking and mortgage services—thus turning itself into more of a discount investor-services firm than a mere brokerage. It derives much more of its revenue from fees for managing and administering assets (45 percent last year, vs. 27 percent in 2000) and net interest revenue from the cash in its bank and money market funds (29 percent last year, vs. 22 percent in 2000).
If Schwab had not waived the fees it charged on money market funds last year—a move Schwab ordered because their interest yield was so low—trading would have accounted for just 20 percent of last year's revenue and interest would have accounted for 32 percent. And if interest rates do head higher, a report by JPMorgan Chase (JPM) analyst Kenneth B. Worthington said this month, Schwab's earnings will react like a "coiled spring." As rates rise from 2010 to 2012, he predicts, Schwab's net income will more than double.
"We make little bits of money on everything, for the most part," says Schwab. "We are completely neutral about what you do. We would probably make more money on money that sits in a money market fund than on a stock you buy and hold. But we don't have an agenda. We really don't."
Yet the Schwab brand is not about making a killing by collecting interest on the money that clients have sitting in their accounts. The brand lives and dies by "Ask Chuck," as a place where befuddled investors go to not get screwed. And Schwab can't continue to be the "Trusted Advisor" if the client assets of its advisory business aren't growing. It's got to show that it's helping investors, and that means guiding them into vehicles that show growth, not stagnation. "Individual investors must understand asset allocation," says Schwab. "With just a few thousand dollars, you can get a little slice of this and a little slice of that—large caps, small caps, emerging markets, and then build on it," he says. The point is not to get in on the ground floor of the next Google (GOOG) and ride a juggernaut. "You're going to get maybe 5 to 10 percent per annum over 5 to 20 years—maybe 30. That's still pretty good."
The day after the Schwab seminar in Atlanta, one of its attendees, Gene Perkins, 66, returned to Robinson Martin's office. Though he has done his own investing since he sold his restaurant business three years ago, Perkins is now enlisting SChwab so he doesn't get burned, as he did in the 2008 crash when his investments lost 28 percent of their value. He and Martin are working on an asset allocation plan, and it's pretty tough going. Perkins' approach to investing is practically bipolar. At first, he presses Martin about the safest assets. "So what if you just buy treasuries and CDs?" Perkins asks. "Would it kill me to lose a little ground [to inflation] if it lets me sleep at night? It's all relative."
Within minutes, Perkins is trying to elicit a little stockpicking from Martin. That hybrid approach was a big winner during the long bull market. Even disciplined investors could dip in now and then, roll the dice and maybe make a windfall. "You're going to be mad at me for bringing this up," Perkins says. "But if the market tanks, there's going to be some good buys....Let's say the market closes down 80...I may be wrong, dead wrong, and I hope I am. But I got eight or nine stocks here...." He gestures to a hand-scrawled list: McDonald's (MCD), BP (BP), Altria (MO), Citi (C). He's got good arguments for each. "McDonald's is at $68—that's my business. If I can get it at $65, that's a good deal. And Citi...I can wait it out. If Citi is still at $4 a share four years from today, well then I deserve to lose money on that account."
Martin listens patiently and then shakes his head. "Gene, that's too much risk," he says. What will Perkins do with the gains? "Keep it in cash?" Perkins ventures. "Or wait till the market tanks again and buy some more deals?" Responds Martin: "Gene, that's head fakes. When the market tanks again, you will pull everything out. You are playing Vegas odds."
Perkins slumps back in his chair. "I just have a lot to make up. I can't afford to take another hit."
Martin continues calmly: "You said McDonald's and Citi, Gene, and that may well be. But what you're missing is a hedge. Asset allocation is your hedge. You started this conversation with capital preservation, and what capital preservation has to be is a balance between risk and growth. Ultimately what we're trying to do is get out of the guessing game."
Martin keeps trying, his bedside manner patient but firm. Once Perkins has a plan in place, his assets will be invested broadly across asset classes to mitigate his risk. What he has to decide is the balance between risk and reward. With a financial plan working for him, "it's all math at that point," explains Martin. The hard part for so many investors is having to constantly recalibrate the portfolio to keep the asset classes in line with each other. That means scaling back on—not rushing into—sectors that are growing fast. To individual investors who came of age in a bull market, it's all painfully counterintuitive.
Perkins has heard it all before. "Asset allocation is the opposite of market timing, I do understand that," he sighs. "You all have made that crystal clear." And then he gets to the heart of the matter, the reason these investing decisions are causing him so much agony. He has no heirs. He will begin drawing on his retirement funds at 70. "If I live to be 90...if I start drawing at 70, will there be enough?" The subprime crash was a huge setback, and now he doesn't know. "I don't need to have anything left over. I'd like to be broke when I'm dead. I don't even need a casket. As long as I have enough. I just don't want to run out before I die."
Morris is a Bloomberg Businessweek contributor.
http://www.businessweek.com/magazine/content/10_23/b4181058561674.htm
Subscribe to:
Posts (Atom)