DECEMBER 13, 2008
Fund Fraud Hits Big Names
Madoff's Clients Included Mets Owner, GMAC Chairman, Country-Club Recruits
By ROBERT FRANK, PETER LATTMAN, DIONNE SEARCEY and AARON LUCCHETTI
New potential victims emerged of Wall Street veteran Bernard Madoff's alleged giant Ponzi scheme, with international banks, hedge funds and wealthy private investors among those sorting out what could amount to tens of billions of dollars in losses.
New York Mets owner Fred Wilpon, GMAC LLC Chairman J. Ezra Merkin and former Philadelphia Eagles owner Norman Braman were among the dozens of seemingly sophisticated investors who placed money on what could prove to be history's largest financial scam.
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Complete Coverage: Bernard Madoff
How Madoff Makes People Look Dumb
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SEC Press Release on Madoff's Case
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Criminal Complaint
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Bernie Madoff Asks Investors To Keep Mum 5/7/2001
Wall Street Mystery Features a Big Board Rival 12/16/1992
Giant French bank BNP Paribas, Tokyo-based Nomura Holdings Inc. and Neue Privat Bank in Zurich are also exposed, according to people familiar with the matter.
And at least three funds of hedge funds -- which raise money from investors and farm it out to hedge funds -- may have significant losses. Fairfield Greenwich Group and Tremont Capital Management of New York placed hundreds of millions of their investors' dollars into funds overseen by Mr. Madoff. On Friday, Maxam Capital Management LLC reported a combined loss of $280 million on funds they had invested with Mr. Madoff.
"I'm wiped out," said Sandra Manzke, Maxam's founder and chairman. The Darien, Conn., fund of hedge funds will have to close as a result of the losses, she said.
Mr. Madoff, the founder and primary owner of Bernard L. Madoff Investment Securities LLC in New York, was arrested and charged Thursday. Prosecutors allege that the 70-year-old Mr. Madoff hid losses, paying certain investors returns using principal he received from other investors. Prosecutors and regulators have yet to determine how much has been lost, or the amount in assets still held by Mr. Madoff's business.
The alleged fraud has "swept up some of the most prominent and wealthy Americans, along with many people who thought they were embarking on a comfortable retirement and have now been left destitute," says Brad Friedman, a lawyer at Milberg LLP, which with Seeger Weiss LLP represents more than 30 investors with losses they believe could total more than $1 billion.
In criminal and civil complaints, Mr. Madoff is quoted as saying the losses could amount to $50 billion.
"This is a real tragedy," Mr. Madoff's attorney, Ike Sorkin, said Friday. "We're going to fight through these events and do what we can to minimize the loss."
Details emerged Friday of how Mr. Madoff ran the alleged scam, fostering a veneer of exclusivity and creating an A-list of investors that became his most powerful marketing tool. From New York and Florida to Minnesota and Texas, the money manager became an insider's choice among well-heeled investors seeking steady returns. By hiring unofficial agents, tapping into elite country clubs and creating "invitation only" policies for investors, he recruited a steady stream of new clients.
During golf-course and cocktail-party banter, Mr. Madoff's name frequently surfaced as a money manager who could consistently deliver high returns. Older, Jewish investors called Mr. Madoff " 'the Jewish bond,' " says Ken Phillips, head of a Boulder, Colo., investment firm. "It paid 8% to 12%, every year, no matter what."
As his reputation grew, Mr. Madoff gained the trust of prominent businessmen, including ex-Eagles owner Mr. Braman, who owns a chain of Florida auto dealers. A voicemail message left with Mr. Braman's office was not immediately returned.
Mets owner Mr. Wilpon, who also owns real-estate investor Sterling Equities, often raved about Mr. Madoff's investment prowess and invested tens of millions of dollars of both his own money and the team's with his company, say financiers who have worked with him. Mr. Madoff handled investments for the Judy & Fred Wilpon Family Foundation, which distributed about $1 million a year in 2005 and 2006 to charities, according to its most recent federal tax returns..
Mets spokesman Jay Horowitz declined to comment Friday. Mr. Wilpon's Sterling Equities said in a statement: "We are shocked by recent events and, like all investors, will continue to monitor the situation."
Mr. Merkin, the chairman of former General Motors Corp. financing arm GMAC, is also a money manager at Ascot Partners LLC in New York. Ascot, which had $1.8 billion under management as of Sept. 30, had substantially all of its assets invested with Mr. Madoff, according to a letter to Mr. Merkin sent to clients Thursday night. Mr. Merkin said as one of the largest investors in Ascot, he believed he had personally "suffered major losses from this catastrophe."
Mr. Merkin could not be reached for comment.
Mr. Madoff tapped social networks in Dallas, Chicago, Boston and Minneapolis. In Minnesota, he attracted investors from Hillcrest Golf Club of St. Paul and Oak Ridge Country Club in Hopkins, investors say. One of them estimated that investors from the two clubs may have invested more than $100 million combined.
One of the largest clusters of Madoff investors was in Florida, where losses could be substantial. Mr. Madoff relied on a network of friends, family and business colleagues to attract investors. According to investors and agents, some of these agents were paid commissions for harvesting investors. Others had separate, lucrative business relationships with Mr. Madoff.
"If you were eating lunch at the club or golfing, everyone was always talking about how Madoff was making them all this money," one investor says. "Everyone wanted to sign up."
Jeff Fischer, a top divorce attorney in Palm Beach, says many of his clients were also Mr. Madoff's clients. "Every big divorce that came through my office had portfolio positions with Madoff," he says.
Two of his investors said that among his clients, Mr. Madoff was considered a money-management legend; they would joke that if Mr. Madoff was a fraud, he'd take down half the world with him.
Richard Spring, a Boca Raton resident and former securities analyst, says he had about $11 million -- or 95% of his net worth -- invested with Mr. Madoff. "That's how much I believed in him," Mr. Spring said.
Inside Wall Street's Madoff Scandal3:55
Another large-scale scandal rocks Wall Street as Bernard Madoff, a Wall Street titan and investment advisor was arrested for an alleged $50 billion dollar fraud against investors, WSJ's Kelsey Hubbard and Amir Efrati discuss.
Mr. Spring said he was also one of the unofficial agents who connected Mr. Madoff with dozens of investors, from a teacher who put in $50,000 to entrepreneurs and executives who would put in millions. Mr. Spring said Mr. Madoff didn't want people to put in large amounts right away. "Bernie would tell me, 'Let them start small, and if they're happy the first year or two, they can put it more.' "
Mr. Spring says he never was paid a commission, but he received fees from a small investment-research firm that counted Mr. Madoff as a client; he declined to say how much he received. He said investors would always come to him asking to invest with Mr. Madoff. "I never solicited anyone," he says.
Mr. Spring says he never detected signs of impropriety with Mr. Madoff's investing, but he concedes that he may receive some blame from some investors. "I can understand where people who lost money are looking for a scapegoat," he says. "I'm heartbroken that so many people have been hurt so badly."
Mr. Madoff's main go-between in Palm Beach was Robert Jaffe, say several investors. Mr. Jaffe is the son-in-law of Carl Shapiro, the founder and former chairman of apparel company Kay Windsor Inc. and an early investor and close friend of Mr. Madoff's. Mr. Jaffe, a philanthropist in Palm Beach, attracted many investors from the Palm Beach Country Club in Palm Beach, Fla.
A spokeswoman for Mr. Jaffe's family said several family members were investors with Mr. Madoff and were "significantly adversely impacted" by recent events. There are no indications that Mr. Jaffe or Mr. Spring are implicated in the alleged fraud. Mr. Jaffe didn't return messages yesterday.
Other investors stand to lose through their investments with the likes of Fairfield Greenwich Group and Tremont Capital Management, funds of hedge funds that invested their cash with Mr. Madoff.
"Needless to say, our level of anger and dismay over the apparent betrayal by Mr. Madoff and his organization of his 14-year relationship with Tremont is immeasurable," Tremont told clients in a letter Friday.
Fairfield Greenwich said in a statement late Friday that it is trying to assess the extent of potential losses. The firm said that on Nov. 1, it had $7.5 billion in investments connected to Mr. Madoff's firm, slightly more than half of its total assets. Founding partner Jeffrey Tucker said the firm had no indication of any potential wrongdoing. "We are shocked an appalled by this news," he said.
Ms. Manzke, 60, of Maxam Capital Management, said she met Mr. Madoff through investors in the mid-1980s and introduced him to Tremont, where she was then chief executive. That introduction led to Tremont's decision to market Mr. Madoff as a money manager to its own investors, she adds.
In November, she says, Maxam asked to pull $30 million from Mr. Madoff, and he returned the money.
"He was a low-key guy," Ms. Manzke says. "He would say, 'Look, I'm a market-maker, and I don't want anyone to know I'm running money.' It was always for select people. He was always closed, he wasn't taking new money."
Several European investors were also apparent victims. Bramdean Alternatives in the U.K. said it had more than 9% of its portfolio invested in Madoff funds. Geneva-based Banque Benedict Hentsch, a white-glove private bank, said it is exposed for $47.5 million.
BNP Paribas's exposure, the extent of which is not clear, may stem from BNP's lending relationship with a fund of funds that was a big Madoff client, said people familiar with the matter. A BNP spokeswoman declined to comment.
Nomura and Neue Privat Bank, meanwhile, together marketed access to Fairfield Sentry Ltd., a fund overseen by Mr. Madoff and sold through Fairfield Greenwich. The shares offered by Neue Privat and Nomura were leveraged three times -- meaning $3 of borrowed money was added to every $1 of capital invested in order to magnify returns, greatly increasing the potential losses for those investors.
A Nomura spokesman declined to comment. A message left with Neue Privat was not returned.
The federal complaints against Mr. Madoff allege his fraudulent activities came through a secretive private wealth-management wing of Bernard L. Madoff Investment Securities, the investment firm he founded in 1960. On Wall Street, his company was perhaps better known for its operations in market-making -- the business of serving as a middleman between buyers and sellers -- and proprietary trading.
Through those higher-profile parts of his operation, Mr. Madoff was a pioneer in trading New York Stock Exchange shares away from the exchange. He is a past chairman of the board of directors of the Nasdaq Stock Market as well as a member of the board of governors of the National Association of Securities Dealers and a member of numerous committees of the organization, according to his firm's Web site.
Mr. Madoff owns a home in Roslyn, N.Y., records show, and an elaborate beachfront home and grounds in Montauk on Long Island.
Mr. Madoff and his wife live in an apartment building on Manhattan's Upper East Side where property records list individual apartments valued at more than $5 million. One property database estimated the 2008 market value of Mr. Madoff's two-floor unit to be roughly $9 million. For years he has served as president of the building's co-op board, according to a tenant.
Tenants say he appeared down-to-earth, friendly and always greeted everyone by their first name.
Colleagues of Mr. Madoff said he was fair to those he dealt with and generous to charities including the Special Olympics. Mr. Madoff treated employees well and loved to take friends and colleagues on his 55-foot fishing boat, called Bull, said Frank Christensen, a retired New York Stock Exchange broker. "I really think very highly of him," said Mr. Christensen. "People make mistakes."—Matthew Futterman, Jenny Strasburg, David Enrich, and Craig Karmin contributed to this article.
Write to Robert Frank at robert.frank@wsj.com, Peter Lattman at peter.lattman@wsj.com, Dionne Searcey at dionne.searcey@wsj.com and Aaron Lucchetti at aaron.lucchetti@wsj.com
http://online.wsj.com/article/SB122914169719104017.html
Sunday 14 December 2008
It's All in Our Heads - the Negative Wealth Effect
DECEMBER 2, 2008, 12:01 P.M. ET
Essay
It's All in Our Heads
We spend how we feel -- even when our reality hasn't changed much at all
By DAVE KANSAS
My workaday financial life hasn't changed much in the past year. So why am I acting as if it has?
I don't splurge on expensive dinners anymore, and I walk rather than drive places. I compare grocery prices for the first time in years.
In fact, as I look around, I find my friends and I are making all kinds of thrifty decisions that would never have crossed our minds just a few months ago. And it's a stark reminder that the way we think about money can often be detached from our immediate, personal situation.
It doesn't make any difference that most of us continue to hold down the same jobs we had before unemployment rates started to rise. It doesn't matter that our personal circumstances are the same as they've been for the past few years. What matters, instead, is the vague uncertainty that has descended on us. What matters is our unknown future.
So even if our own lives have changed little, we cite a friend's lost job as a reason to worry afresh about our own financial situation. We forget -- or ignore -- that our friends also lost jobs during periods of robust economic health. But our fiscal lens shifts when we see dark headlines barking about dire problems at General Motors or the government coughing up hundreds of billions to try to save former titans like AIG.
Reversing the Wealth Effect
All of this, of course, is well known to economists. They call it the wealth effect, and it maintains that when people feel wealthier, because of rising home values or a climbing stock market, they tend to spend more freely. Many people don't extract money from their home or their investment accounts during such periods, but the simple sense of having more money opens up the wallet. More trips are taken, more meals are eaten at nice restaurants. The economy has benefited greatly from this wealth effect in recent years.
Until now, though, many of us have never lived through the wealth effect's evil cousin: the negative wealth effect that is roiling the economy as the consumer retrenches. Everything -- homes, portfolios, blue-chip companies, the local bank -- seems to be losing value. We still aren't extracting money from our homes or our investment accounts. But the simple sense of having less money closes the wallet. And the future -- always unknown -- seems a whole lot scarier.
That fear has certainly permeated my life. It first hit me this summer when shopping for produce at the grocery store. Though I had once worked as a dairy manager at a grocery store, I had seldom checked prices on everyday items. I just kind of assumed that prices were what they were and you got what you got.
Strolling through the produce department, I found myself comparing prices of fresh cherries, and deciding they were too expensive to buy. I also realized that I had stopped buying nice bottles of wine for dinner; it seemed silly to spend that much money when a cheaper wine would be just fine.
This same scenario played out in countless other small ways -- in what I no longer did or bought.
Home for the Holidays
Many other people I know, regardless of financial circumstance, are going through a similar process. My family in Minnesota has a big Thanksgiving event every two years. In the past, people have come from all over the U.S. and from Europe. We once had to use the kitchen of a local school to include everyone. This year, the confab had fewer attendees. Despite everyone doing well, and in some cases actually doing far better financially than in the past, they balked at the high cost of air travel.
My friends are also finding their spending and saving psychology changing. Most of them still have the same jobs and same basic costs as before, but their mind-set has changed. A friend of mine in finance talked about how he and his office have set up sandwich-making contests for lunch. They order in the basics from a supermarket and have at them. In better times, he'd talk about treating colleagues to lunch at a nice restaurant. He also recently said he's thinking about leaving New York. He figures taxes are headed sharply higher and the financial crisis will bite hard. And thinking about raising his family in New York causes too much economic "brain damage," he says.
A friend who works on a sports Web site in New York, recently married, has started questioning whether to close on a recently purchased apartment. Even though she and her husband have good jobs and can't get the deposit back, she's wondering if putting so much of her family money into real estate is the right move in the current climate. A colleague of mine at work is going through the identical math in almost the identical situation.
Everyone seems to have caught the same bug, with minds switching off the spend gene almost in unison. Walking past a posh French restaurant (prix fixe lunch: $45) near a fund manager friend's office, I asked if he'd ever gone there for lunch. He hadn't and added that it seemed like a "pre-crisis" kind of place.
Thrift and Fear
Thrift, of course, can be a good notion. Americans have for some time spent more than they've made, leading to the first so-called negative savings rates since the 1930s. This overspending, largely driven by borrowed money, occurred in the corporate and financial sector as well. It got us into the mess we're in.
Now, as individuals rediscover thrift, companies are going through their own process of "deleveraging," or reducing their credit-bingeing ways. And this is what has sent the economy into its downward spiral.
Upon taking office in 1933, Franklin Roosevelt declared that "the only thing we have to fear is fear itself." He was talking directly to people's psychology about money. If everyone put their money under a mattress and banks feared to lend, growth would not return.
It's hard to envision things getting to that level today, but fear, once it takes hold, can be difficult to turn around. And there's little question that fear about the future is having a negative impact on our financial psychology.
How to reverse things? For me, an increase in my savings will give me more confidence and less fear (although it certainly isn't going to do much to help the economy in the short run). I suspect that's true for a great many other people as well. The headlines will also play a role. Until the news moves from "crisis" to "confidence," it's hard to erase fear and concern about what's around the next bend.
Ultimately, things will get better, as they always have. Then we will once again be optimists and less afraid of risks. Until then, though, I think I'll just pass on the cherries.—Mr. Kansas is the president of FiLife.com, a personal-finance Web site owned by Dow Jones & Co. and IAC Corp.
Write to Dave Kansas at dave.kansas@wsj.com
http://online.wsj.com/article/SB122765006147657695.html
Essay
It's All in Our Heads
We spend how we feel -- even when our reality hasn't changed much at all
By DAVE KANSAS
My workaday financial life hasn't changed much in the past year. So why am I acting as if it has?
I don't splurge on expensive dinners anymore, and I walk rather than drive places. I compare grocery prices for the first time in years.
In fact, as I look around, I find my friends and I are making all kinds of thrifty decisions that would never have crossed our minds just a few months ago. And it's a stark reminder that the way we think about money can often be detached from our immediate, personal situation.
It doesn't make any difference that most of us continue to hold down the same jobs we had before unemployment rates started to rise. It doesn't matter that our personal circumstances are the same as they've been for the past few years. What matters, instead, is the vague uncertainty that has descended on us. What matters is our unknown future.
So even if our own lives have changed little, we cite a friend's lost job as a reason to worry afresh about our own financial situation. We forget -- or ignore -- that our friends also lost jobs during periods of robust economic health. But our fiscal lens shifts when we see dark headlines barking about dire problems at General Motors or the government coughing up hundreds of billions to try to save former titans like AIG.
Reversing the Wealth Effect
All of this, of course, is well known to economists. They call it the wealth effect, and it maintains that when people feel wealthier, because of rising home values or a climbing stock market, they tend to spend more freely. Many people don't extract money from their home or their investment accounts during such periods, but the simple sense of having more money opens up the wallet. More trips are taken, more meals are eaten at nice restaurants. The economy has benefited greatly from this wealth effect in recent years.
Until now, though, many of us have never lived through the wealth effect's evil cousin: the negative wealth effect that is roiling the economy as the consumer retrenches. Everything -- homes, portfolios, blue-chip companies, the local bank -- seems to be losing value. We still aren't extracting money from our homes or our investment accounts. But the simple sense of having less money closes the wallet. And the future -- always unknown -- seems a whole lot scarier.
That fear has certainly permeated my life. It first hit me this summer when shopping for produce at the grocery store. Though I had once worked as a dairy manager at a grocery store, I had seldom checked prices on everyday items. I just kind of assumed that prices were what they were and you got what you got.
Strolling through the produce department, I found myself comparing prices of fresh cherries, and deciding they were too expensive to buy. I also realized that I had stopped buying nice bottles of wine for dinner; it seemed silly to spend that much money when a cheaper wine would be just fine.
This same scenario played out in countless other small ways -- in what I no longer did or bought.
Home for the Holidays
Many other people I know, regardless of financial circumstance, are going through a similar process. My family in Minnesota has a big Thanksgiving event every two years. In the past, people have come from all over the U.S. and from Europe. We once had to use the kitchen of a local school to include everyone. This year, the confab had fewer attendees. Despite everyone doing well, and in some cases actually doing far better financially than in the past, they balked at the high cost of air travel.
My friends are also finding their spending and saving psychology changing. Most of them still have the same jobs and same basic costs as before, but their mind-set has changed. A friend of mine in finance talked about how he and his office have set up sandwich-making contests for lunch. They order in the basics from a supermarket and have at them. In better times, he'd talk about treating colleagues to lunch at a nice restaurant. He also recently said he's thinking about leaving New York. He figures taxes are headed sharply higher and the financial crisis will bite hard. And thinking about raising his family in New York causes too much economic "brain damage," he says.
A friend who works on a sports Web site in New York, recently married, has started questioning whether to close on a recently purchased apartment. Even though she and her husband have good jobs and can't get the deposit back, she's wondering if putting so much of her family money into real estate is the right move in the current climate. A colleague of mine at work is going through the identical math in almost the identical situation.
Everyone seems to have caught the same bug, with minds switching off the spend gene almost in unison. Walking past a posh French restaurant (prix fixe lunch: $45) near a fund manager friend's office, I asked if he'd ever gone there for lunch. He hadn't and added that it seemed like a "pre-crisis" kind of place.
Thrift and Fear
Thrift, of course, can be a good notion. Americans have for some time spent more than they've made, leading to the first so-called negative savings rates since the 1930s. This overspending, largely driven by borrowed money, occurred in the corporate and financial sector as well. It got us into the mess we're in.
Now, as individuals rediscover thrift, companies are going through their own process of "deleveraging," or reducing their credit-bingeing ways. And this is what has sent the economy into its downward spiral.
Upon taking office in 1933, Franklin Roosevelt declared that "the only thing we have to fear is fear itself." He was talking directly to people's psychology about money. If everyone put their money under a mattress and banks feared to lend, growth would not return.
It's hard to envision things getting to that level today, but fear, once it takes hold, can be difficult to turn around. And there's little question that fear about the future is having a negative impact on our financial psychology.
How to reverse things? For me, an increase in my savings will give me more confidence and less fear (although it certainly isn't going to do much to help the economy in the short run). I suspect that's true for a great many other people as well. The headlines will also play a role. Until the news moves from "crisis" to "confidence," it's hard to erase fear and concern about what's around the next bend.
Ultimately, things will get better, as they always have. Then we will once again be optimists and less afraid of risks. Until then, though, I think I'll just pass on the cherries.—Mr. Kansas is the president of FiLife.com, a personal-finance Web site owned by Dow Jones & Co. and IAC Corp.
Write to Dave Kansas at dave.kansas@wsj.com
http://online.wsj.com/article/SB122765006147657695.html
Comeback Funds
Comeback Funds
By ROB WHERRY
Lately it seems that whenever we talk to advisers and industry watchers, there's one fund family that generates the most discussion: Dodge & Cox. The venerable 78-year-old firm got caught this year holding stocks like Fannie Mae, American International Group and Wachovia as those companies spiraled downward. That has caused its flagship fund, Dodge & Cox Stock, to post a 47.7% loss in 2008, worse than the Standard & Poor's 500-stock index's 41.1% decline.
That's an unaccustomed place for this company. Its funds ordinarily are ranked high in their respective categories. Indeed, Dodge & Cox Stock has returned an average annual 4.4% the past decade, a tally that puts it near the top of the large-cap value category. That leaves shareholders wondering: Will Dodge & Cox make a comeback? While we think the answer is an unequivocal yes, we also realize we don't have a crystal ball. Unfortunately for investors, there are plenty of other funds out there that sport a similar penthouse-to-doghouse track record.
By ROB WHERRY
Lately it seems that whenever we talk to advisers and industry watchers, there's one fund family that generates the most discussion: Dodge & Cox. The venerable 78-year-old firm got caught this year holding stocks like Fannie Mae, American International Group and Wachovia as those companies spiraled downward. That has caused its flagship fund, Dodge & Cox Stock, to post a 47.7% loss in 2008, worse than the Standard & Poor's 500-stock index's 41.1% decline.
That's an unaccustomed place for this company. Its funds ordinarily are ranked high in their respective categories. Indeed, Dodge & Cox Stock has returned an average annual 4.4% the past decade, a tally that puts it near the top of the large-cap value category. That leaves shareholders wondering: Will Dodge & Cox make a comeback? While we think the answer is an unequivocal yes, we also realize we don't have a crystal ball. Unfortunately for investors, there are plenty of other funds out there that sport a similar penthouse-to-doghouse track record.
This week we're focusing on those funds, with an eye toward finding the ones best poised to bounce back. We started with ones that have stellar track records over the past decade, but also were in the bottom 40% of their peer groups the past three years. We knocked out those with sales loads and added our usual fee criteria.
We were left with 28 equity funds. We handicapped that list by picking seven we think will return to form based on adviser interviews, managers' reputations, past track records, and the funds' strategy and current portfolios. The finalists are listed below.
Fees, Even Returns and Auditor All Raised Flags
By GREGORY ZUCKERMAN
Bernard L. Madoff is alleged to have pulled off one of the biggest frauds in Wall Street history. But there were multiple red flags along the way, including a series of accusations leveled against Mr. Madoff's operation. Now some are asking why regulators and investors didn't pick up on the alleged scheme long ago.
Image from Madoff.com
Bernard Madoff
"There's no smoking gun, but if you added it all up you wonder why people either did not get it or chose to ignore the red flags," says Jim Vos, who runs Aksia LLC, a firm that advises investors and came away worried after examining Mr. Madoff's operation.
On Thursday, Mr. Madoff was arrested for what federal agents described as a massive Ponzi scheme, which could leave investors with billions in losses. A spokesman for Mr. Madoff said: "Bernie Madoff is a longstanding leader in the financial services industry and we are cooperating fully with the government and regulators investigations into this unfortunate set of events."
The first tip-off for some was the steady returns generated by the firm in every kind of market. Mr. Madoff would buy a basket of stocks resembling an S&P index while simultaneously selling options that pay off for the buyer if these stocks soar, while also buying options that pay off if the index tumbles. The supposed goal was to have smooth, steady returns.
Harry Markopolos, who years ago worked for a rival firm, researched Mr. Madoff's stock-options strategy and was convinced the results likely weren't real.
"Madoff Securities is the world's largest Ponzi Scheme," Mr. Markopolos, wrote in a letter to the U.S. Securities and Exchange Commission in 1999.
Mr. Markopolos pursued his accusations over the past nine years, dealing with both the New York and Boston bureaus of the SEC, according to documents he sent to the SEC reviewed by The Wall Street Journal.
Bernard L. Madoff is alleged to have pulled off one of the biggest frauds in Wall Street history. But there were multiple red flags along the way, including a series of accusations leveled against Mr. Madoff's operation. Now some are asking why regulators and investors didn't pick up on the alleged scheme long ago.
Image from Madoff.com
Bernard Madoff
"There's no smoking gun, but if you added it all up you wonder why people either did not get it or chose to ignore the red flags," says Jim Vos, who runs Aksia LLC, a firm that advises investors and came away worried after examining Mr. Madoff's operation.
On Thursday, Mr. Madoff was arrested for what federal agents described as a massive Ponzi scheme, which could leave investors with billions in losses. A spokesman for Mr. Madoff said: "Bernie Madoff is a longstanding leader in the financial services industry and we are cooperating fully with the government and regulators investigations into this unfortunate set of events."
The first tip-off for some was the steady returns generated by the firm in every kind of market. Mr. Madoff would buy a basket of stocks resembling an S&P index while simultaneously selling options that pay off for the buyer if these stocks soar, while also buying options that pay off if the index tumbles. The supposed goal was to have smooth, steady returns.
Harry Markopolos, who years ago worked for a rival firm, researched Mr. Madoff's stock-options strategy and was convinced the results likely weren't real.
"Madoff Securities is the world's largest Ponzi Scheme," Mr. Markopolos, wrote in a letter to the U.S. Securities and Exchange Commission in 1999.
Mr. Markopolos pursued his accusations over the past nine years, dealing with both the New York and Boston bureaus of the SEC, according to documents he sent to the SEC reviewed by The Wall Street Journal.
View Interactive
Read more about previous Ponzi schemes.
More
Top Broker Is Accused of Fraud
Madoff Clients Are Shaken by Arrest
The Wallet: Have You Ever Been Scammed?
SEC Press Release on Madoff's Case
SEC Complaint
Press Release on Madoff's Arrest
Criminal Complaint
Archives
Bernie Madoff Asks Investors To Keep Mum 5/7/2001
Wall Street Mystery Features a Big Board Rival 12/16/1992
Read more about previous Ponzi schemes.
More
Top Broker Is Accused of Fraud
Madoff Clients Are Shaken by Arrest
The Wallet: Have You Ever Been Scammed?
SEC Press Release on Madoff's Case
SEC Complaint
Press Release on Madoff's Arrest
Criminal Complaint
Archives
Bernie Madoff Asks Investors To Keep Mum 5/7/2001
Wall Street Mystery Features a Big Board Rival 12/16/1992
In a statement late Friday, the SEC said "staff from the Division of Enforcement in New York completed an investigation in 2007, and did not refer the matter to the Commission for enforcement action." The SEC said it reopened the investigation Thursday. It's not clear what the focus of the 2007 investigation was, or why it was closed. A person familiar with the matter said it related to issues raised by Mr. Markopolos.
Also striking some as odd: Mr. Madoff operated as a broker dealer with an asset management division. Why not simply act as a hedge fund and pocket big gains, rather than profit from trading commissions as the firm seemed to be doing, they asked.
Joe Aaron, for long a hedge fund professional, found that structure suspicious and in 2003 warned a colleague to steer clear of the fund. "Why would a good businessman work his magic for pennies on the dollar?"
Conflicts of interest also proved a concern. "There was no independent custodian involved who could prove the existence of assets," says Chris Addy, founder of Montreal-based Castle Hall Alternatives, which vets hedge funds for clients seeking to invest money. "There's a clear and blatant conflict of interest with a manager using a related-party broker-dealer. Madoff is enormously unusual in that this is not a structure I've seen."
Some trading pros said Mr. Madoff's purported strategy couldn't be pulled off profitably while managing tens of billions of dollars.
"It seemed implausible that the S&P 100 options market that Madoff purported to trade could handle the size of the combined feeder funds' assets which we estimated to be $13 billion," Mr. Vos says.
Recent securities filings showed that the firm held less than $1 billion of shares, raising questions about where the rest of the money was. Some of Mr. Madoff's investors say they were told the firm put the bulk of its money in cash-equivalents at the end of each quarter, explaining why the public filings showed so few shares, but raising questions about where the proof was for all the cash.
Inside Wall Street's Madoff Scandal3:55
Another large-scale scandal rocks Wall Street as Bernard Madoff, a Wall Street titan and investment advisor was arrested for an alleged $50 billion dollar fraud against investors, WSJ's Kelsey Hubbard and Amir Efrati discuss.
Until at least November, 2006, the firm, which claimed to manage billions of dollars and be among the largest market makers in the stock market, used as its auditor Friehling & Horowitz, a small New City, New York firm.
Mr. Vos says his firm hired a private investigator and determined that the accounting firm had only three employees, one of whom was 78 and lived in Florida, and another was a secretary, and that it operated in a 13 foot by 18 foot office. His firm felt that was too small an operation to keep an eye on such a large firm operating a complicated trading strategy. A message left for the accounting firm was not returned.
Meanwhile, a series of media stories also raised questions about Madoff's operations, including a piece entitled "Madoff Tops Charts; Skeptics Ask How" in industry publication MAR/Hedge in May, 2001, and a subsequent story in Barron's. Mr. Madoff generally brushed off reporters' questions, citing the audited results and arguing that his business was too complicated for outsiders to understand.—Kara Scannell and Jenny Strasburg contributed to this article
Write to Gregory Zuckerman at gregory.zuckerman@wsj.com
The Dollar Powers Through the Turmoil
DECEMBER 6, 2008, 11:58 P.M. ET
The Dollar Powers Through the Turmoil
The Dollar Powers Through the Turmoil
By JOANNA SLATER
Amid the worst financial crisis in decades, the U.S. dollar has come roaring back to life.
Over the past four months, as investors around the world fled from risk, the dollar recouped more than two years' worth of losses against a broad group of currencies, including its swoon in the early part of this year.
Amid the worst financial crisis in decades, the U.S. dollar has come roaring back to life.
Over the past four months, as investors around the world fled from risk, the dollar recouped more than two years' worth of losses against a broad group of currencies, including its swoon in the early part of this year.
Since the start of August, the dollar has strengthened 23% against the euro, 34% against the British pound, and still more against some currencies in developing countries.
Of course, the buck's recent rally hasn't fully undone its decline, which began back in 2002. Still, it represents a significant turning point for a currency whose long weakness had turned it into a source of rueful amusement for Americans.
Of course, the buck's recent rally hasn't fully undone its decline, which began back in 2002. Still, it represents a significant turning point for a currency whose long weakness had turned it into a source of rueful amusement for Americans.
Safe Port in the Storm
To the surprise of many observers, the greenback turned out to be a major beneficiary of the global flight from risky assets and the unwinding of bets based on borrowed cash, much of it in dollars. In a time of extreme financial stress, investors sought the relative safety of the world's reserve currency, and if possible, U.S. Treasury bonds.
The ever-widening scope of the crisis also helped the buck: It rapidly became clear that the U.S. is far from the only country with economic woes and hobbled banks.
For investors, the dollar's resurgence is proving a tricky puzzle. Some believe that the comeback will prove to be short-lived, given the enormous challenges facing the U.S. economy. But others say it's likely to endure well into next year as economies around the globe grapple with a sharp slowdown.
"We are roughly halfway through the rally in the dollar," predicted Stephen Jen, global head of currency research at Morgan Stanley, in a recent note. Mr. Jen thinks the dollar could face a harder slog in the second half of next year as the full costs of various government bailouts become clear.
For now, a stronger dollar is a welcome development for Americans traveling abroad, who had become accustomed to seeing their dollars buy less and less on each trip.
But for some companies, it's less desirable. A stronger dollar means that American exporters' goods and services are more expensive for foreign buyers, reducing their competitiveness. It also represents a drawback for American multinationals. Their overseas earnings will be worth less when converted back into dollars, denting sales and profits.
The dollar's rally has also helped clobber one of the most popular investing trends of recent years: buying foreign stocks. For much of the last six years, U.S. investors got an additional bonus when putting money overseas. As the dollar declined, gains in foreign currencies would convert into more dollars, sweetening returns.
Overseas Stock Losses
Now the opposite dynamic is unfolding. Global shares have plunged and the dollar has surged against nearly all currencies (with the Japanese yen the major exception). So not only have foreign shares fallen, they're also worth less in dollar terms, magnifying the losses for U.S. investors.
The impact has been substantial in some cases: For instance, the MSCI Emerging Markets Index, which tracks stocks in developing countries, has fallen by half this year in local-currency terms. But translated back into dollars, it is down about 60%.
"The dollar has been the wind at our back for the past five years," says James Moffett, who manages the $3 billion UMB Scout International Fund. "This year it's been in our face."
Mr. Moffett adds that he thinks the currency-related pain for international stocks is nearly finished -- in other words, the dollar is unlikely to strengthen further from here.
Some see clouds gathering for the dollar as the massive programs to assist the ailing economy work through the system. The problem isn't necessarily that the U.S. fiscal deficit will increase. "Neither economic theory nor the historical record provides a clear link between fiscal stimulus and [currencies]," noted a recent report from J.P. Morgan Chase.
Instead, observers are focused on the actions of the U.S. Federal Reserve, which has expanded its own balance sheet, essentially creating money to fund a variety of new programs.
Once the economy starts to recover, the massive injections of cash by the Fed could cause rampant inflation, something that's bad for the dollar because it erodes a currency's worth. Others say the Fed will curtail liquidity before that happens, by raising interest rates or through other measures. For now, the Fed is trying to avert a different risk, that of deflation -- a vicious cycle of contracting credit and falling prices.
In the back of their minds, investors also worry about another scenario, in which foreign investors could lose confidence and scale back or stop buying U.S. assets. That would send the dollar plunging and interest rates soaring.
Investment Opportunities
Of course, that possibility remains remote. In some ways, what has unfolded so far is the opposite of such a crisis. Rather than shunning assets like U.S. Treasurys, investors have flocked to them in a sign that they continue to see them as a haven in an uncertain world.
For investors, the dollar's latest surge and murky future present a number of choices. There are a number of funds that aim to track the movements of various currencies against the dollar, including nine exchange-traded funds from Rydex Investments. Such instruments essentially involve taking a view on currency directions -- which is always risky.
If you believe that, in the long run, the dollar is likely to weaken, then one strategy is to own stocks or bonds denominated in other currencies. If the dollar loses ground, the returns will be worth more when converted back into dollars.
Bonds denominated in other currencies are a more direct way to bet on such fluctuations, since most of a stock's return comes from factors other than currency gains or losses.
Write to Joanna Slater at joanna.slater@wsj.com
1931 and 2008: Will Market History Repeat Itself?
THE INTELLIGENT INVESTOR
NOVEMBER 22, 2008
1931 and 2008: Will Market History Repeat Itself?
By JASON ZWEIG
Over the two weeks ended Nov. 20, 2008, the Dow Jones Industrial Average fell 16%. Over the two weeks ended Nov. 20, 1931, the Dow fell 16%.
If you think that is scary, consider this: In the final five weeks of 1931, the Dow fell 20% further. Then it went on to lose yet another 47% before it finally hit rock-bottom on July 8, 1932.
It is vital to realize that markets are never under some obligation to stop falling merely because they have already fallen by an ungodly amount. It also is vital to explore how bad the worst-case scenario can get and to think about how you would respond if it comes to pass.
When it comes to worst-case scenarios, 1931-1932 is it. When the Dow finally stopped going down, in July 1932, it had lost 88% in 36 months. At that point, only five of the roughly 800 companies that still survived on the New York Stock Exchange had lost less than two-thirds of their value from their peak in 1929.
Look back at issues of The Wall Street Journal from 1931, as I did this week, and you may get the chills comparing it to today. "When the [automotive] industry in the near future resumes operations," declared one front-page article on Nov. 9, "it will enjoy the benefits of substantial reductions in labor costs."
The U.S. economy, as measured by gross national product, shriveled by 14.7% in 1931. Although no one expects the economy to grow in the fourth quarter of this year, it is flat year to date and shrank by "only" 0.3% in the third quarter. In 1931, one out of every six Americans was unemployed; today, one in 16 is out of work.
I don't foresee another Great Depression, but I am under no illusion that it can't happen. My parents and grandparents lived through it, and their memories of it have been branded on my brain.
If we are going into another depression, then a residual holding in stocks will be the least of your problems. Depressions hamstring nearly all forms of wealth, not just stocks. From 1929 through 1937, cash earned a compound annual return of 0.7%; intermediate-term bonds, only 4.4%.
None of us can control what the markets do to us. But we can control how we handle money, and we need to learn from our parents and grandparents who survived the Great Depression.
My grandfather was one of those people. An immigrant who bought a farm outside of Albany, N.Y., he literally became a horse trader. He bought wild horses from the Sioux in Montana for $1 apiece, transported them in a railcar to Albany and sold them for $10 each -- after his sons, whose labor cost him nothing, broke and tamed the horses.
In November 1931, my father was 15 years old. As the youngest of three brothers, he was stuck with the worst chore: fetching water at 5 a.m. He had to hang two buckets onto a shoulder yoke, fill them laboriously from the hand-powered water pump near the barn, then lug them back into the house. On winter mornings, the water would freeze on contact, and his trouser legs would creak and clatter as he carried the buckets across the snow.
Later that winter, my grandfather bought a gasoline-powered pump. The next morning, my father started the pump and filled the first bucket, excited at how easy his ordeal had become. The next thing he knew, his feet were dangling off the ground and my grandfather's fist was in his chest, pinning him against the barn wall. Terrified, my dad gasped, "Pop, what did I do?" The engine of the pump was going "ka-thump, ka-thump." My grandfather growled, "You hear them thumps? Every one of them thumps is a nickel!"
He was furious that my father had not turned off the engine between buckets.
I'm going to take a chance and hang onto my stocks. But I'm going to make sure, over the months and years to come, that I turn down the thermostat.
Email: intelligentinvestor@wsj.com
http://online.wsj.com/article/SB122731594413349829.html
NOVEMBER 22, 2008
1931 and 2008: Will Market History Repeat Itself?
By JASON ZWEIG
Over the two weeks ended Nov. 20, 2008, the Dow Jones Industrial Average fell 16%. Over the two weeks ended Nov. 20, 1931, the Dow fell 16%.
If you think that is scary, consider this: In the final five weeks of 1931, the Dow fell 20% further. Then it went on to lose yet another 47% before it finally hit rock-bottom on July 8, 1932.
It is vital to realize that markets are never under some obligation to stop falling merely because they have already fallen by an ungodly amount. It also is vital to explore how bad the worst-case scenario can get and to think about how you would respond if it comes to pass.
When it comes to worst-case scenarios, 1931-1932 is it. When the Dow finally stopped going down, in July 1932, it had lost 88% in 36 months. At that point, only five of the roughly 800 companies that still survived on the New York Stock Exchange had lost less than two-thirds of their value from their peak in 1929.
Look back at issues of The Wall Street Journal from 1931, as I did this week, and you may get the chills comparing it to today. "When the [automotive] industry in the near future resumes operations," declared one front-page article on Nov. 9, "it will enjoy the benefits of substantial reductions in labor costs."
The U.S. economy, as measured by gross national product, shriveled by 14.7% in 1931. Although no one expects the economy to grow in the fourth quarter of this year, it is flat year to date and shrank by "only" 0.3% in the third quarter. In 1931, one out of every six Americans was unemployed; today, one in 16 is out of work.
I don't foresee another Great Depression, but I am under no illusion that it can't happen. My parents and grandparents lived through it, and their memories of it have been branded on my brain.
If we are going into another depression, then a residual holding in stocks will be the least of your problems. Depressions hamstring nearly all forms of wealth, not just stocks. From 1929 through 1937, cash earned a compound annual return of 0.7%; intermediate-term bonds, only 4.4%.
None of us can control what the markets do to us. But we can control how we handle money, and we need to learn from our parents and grandparents who survived the Great Depression.
My grandfather was one of those people. An immigrant who bought a farm outside of Albany, N.Y., he literally became a horse trader. He bought wild horses from the Sioux in Montana for $1 apiece, transported them in a railcar to Albany and sold them for $10 each -- after his sons, whose labor cost him nothing, broke and tamed the horses.
In November 1931, my father was 15 years old. As the youngest of three brothers, he was stuck with the worst chore: fetching water at 5 a.m. He had to hang two buckets onto a shoulder yoke, fill them laboriously from the hand-powered water pump near the barn, then lug them back into the house. On winter mornings, the water would freeze on contact, and his trouser legs would creak and clatter as he carried the buckets across the snow.
Later that winter, my grandfather bought a gasoline-powered pump. The next morning, my father started the pump and filled the first bucket, excited at how easy his ordeal had become. The next thing he knew, his feet were dangling off the ground and my grandfather's fist was in his chest, pinning him against the barn wall. Terrified, my dad gasped, "Pop, what did I do?" The engine of the pump was going "ka-thump, ka-thump." My grandfather growled, "You hear them thumps? Every one of them thumps is a nickel!"
He was furious that my father had not turned off the engine between buckets.
I'm going to take a chance and hang onto my stocks. But I'm going to make sure, over the months and years to come, that I turn down the thermostat.
Email: intelligentinvestor@wsj.com
http://online.wsj.com/article/SB122731594413349829.html
So Many Choices to Rebalance a Portfolio, Made Cheaper by Falling Markets
ROI
OCTOBER 9, 2008, 7:52 A.M. ET
Plunge Gives Investors Chance to Diversify
So Many Choices to Rebalance a Portfolio, Made Cheaper by Falling Markets
By BRETT ARENDS
A lot of people came into this crash totally unprepared. They're holding all their money in a few stocks, or in a few mutual funds that are too similar to one another. They're getting crushed.
No wonder so many are panicking and are selling out.
But if you're in this situation, here's a better idea: Don't bail, but rebalance.
Sell your concentrated or random portfolio, and put your money into a broader mix of investments. The most stable portfolios are spread across multiple assets, asset classes, and investment styles. The good news is that today, because there are so many different investment funds on the market, anyone can do it.
Here's an illustration of what that might look like with, say, $100,000.
Let's say you wanted to put maybe 30%, or $30,000, in bonds to provide some welcome stability. They tend to be less volatile than stocks.
Right now regular Treasurys, the bonds issued by Uncle Sam, are pretty expensive. Everyone's been buying them in panic. The 30-year Treasury as a result pays a paltry 4% interest.
You might decide there are better opportunities elsewhere. Municipals, for example, are actually yielding more than Treasurys and they're tax free. So you could put $10,000 into a municipal-bond fund like Eaton Vance National Municipals, which is yielding well over 5%. You could put another $10,000 into inflation-protected Treasurys, also known as TIPS, which are still reasonably priced. Vanguard's Inflation-Protected Securities is one of the best-known funds. And you might round out your bond holdings by putting $10,000 into a flexible bond fund, like Loomis Sayles Bond, that can pick up opportunities anywhere. Veteran manager Dan Fuss sees some of the best bargains in investment-grade corporate bonds.
Let's then say you still want the bulk of your investments exposed to the world's stock markets. That is, after all, where most money is traditionally made over the long term.
But you might be looking for smart managers who have flexibility to hold cash, protect against market falls, ignore landmines, and grab opportunities where they see them.
You can pick several managers and invest $10,000 with each. Two funds I happen to own are Quaker Strategic Growth (QUAGX) and Fairholme. Both have good long-term records. There are plenty of other good ones out there. Fresh investors might prefer manager Manu Daftary's newer fund, Quaker Global Total Return, which is smaller and has even more flexibility than his Quaker Strategic Growth.
Another good holding might be Diamond-Hill Long-Short, a fund that operates a bit like a hedge fund and seeks to produce good returns in any market.
A fourth might be Gateway, which has a long record of producing good returns with pretty low volatility: For decades, this fund has held equities and sold call options against its holdings to generate income.
You could add further strings to your bow by investing $10,000 each in, say, Japanese equities, emerging markets, and maybe commodities. Examples for the first two might be T. Rowe Price Japan and Vanguard's Emerging Markets Stock Index fund.
On commodities, you've got a pretty broad range of options. You can invest in assets themselves, or the companies that produce them. An example of the former is the streetTracks Gold Trust, an exchange-traded fund that tracks the gold price.
You might reason that gold looked a lot more interesting eight years ago, when it was $250 an ounce and no one was talking about it, than it does now, when it's nearly $900 an ounce and no one will stop talking about it.
As a novice, you might instead decide to place your tenth chip on managed timber, an asset with an excellent long-term track record of producing solid returns. Fund legend Jeremy Grantham, along with the managers of Harvard University's endowment, have been fans recently. One possible route would be to buy shares in Plum Creek, the blue-chip stock in the sector. It's a real-estate investment trust that owns timberland. A caveat: This, too, has risen quite a distance. It's nearly trebled in ten years.
Past performance is no guide to the future, of course. Nonetheless when I checked out how this portfolio would have fared during the turmoil of this decade, it stacked up pretty well.
I could only trace it back to August 2000, when several of these funds were launched. (and I could only include Diamond Hill from its launch in December).
But from August 31, 2000 through this week, with dividends reinvested, this portfolio would have gained about 61%. Wall Street overall, by contrast, is down about 21% over that period.
And this portfolio would have let you sleep a lot easier, too. Through the crash of 2000-2003 it fell just 5%, while the wider market nearly halved.
Almost nothing has been spared in the incredible worldwide crash of the last year. But this portfolio has only fallen 24% from the peak, while Wall Street overall has fallen about 35%.
Like I said, this is only an exercise and an illustration. Anyone can put together a pretty broadly diversified portfolio these days. There are an infinite number of varieties.
You could, for example, replace one of the equity funds above with one specializing in international small cap stocks, like Oakmark International Small Cap (OAKEX). They've been absolutely crushed in the last year and there are plenty of bargains to be had.
Or you could pick some other active fund managers, like Ken Heebner at CGM Focus, or Marty Whitman at Third Avenue Value, or even Warren Buffett at Berkshire Hathaway.
Or you could replace a couple of the investments with closed-end funds trading at big discounts to their net assets. The BlackRock S&P Quality Rankings Global Equity Managed Trust, which invests in top quality blue-chip stocks, is selling for 19% below net asset value. Clough Global Opportunities, a well-managed global investment fund mentioned here before, is an incredible 29% below.
The positive side to this crash is that lots of these investment options are now going cheap. That makes it easier to rebalance your portfolio into something more broadly based, and, one hopes, stable.
Write to Brett Arends at brett.arends@wsj.com
OCTOBER 9, 2008, 7:52 A.M. ET
Plunge Gives Investors Chance to Diversify
So Many Choices to Rebalance a Portfolio, Made Cheaper by Falling Markets
By BRETT ARENDS
A lot of people came into this crash totally unprepared. They're holding all their money in a few stocks, or in a few mutual funds that are too similar to one another. They're getting crushed.
No wonder so many are panicking and are selling out.
But if you're in this situation, here's a better idea: Don't bail, but rebalance.
Sell your concentrated or random portfolio, and put your money into a broader mix of investments. The most stable portfolios are spread across multiple assets, asset classes, and investment styles. The good news is that today, because there are so many different investment funds on the market, anyone can do it.
Here's an illustration of what that might look like with, say, $100,000.
Let's say you wanted to put maybe 30%, or $30,000, in bonds to provide some welcome stability. They tend to be less volatile than stocks.
Right now regular Treasurys, the bonds issued by Uncle Sam, are pretty expensive. Everyone's been buying them in panic. The 30-year Treasury as a result pays a paltry 4% interest.
You might decide there are better opportunities elsewhere. Municipals, for example, are actually yielding more than Treasurys and they're tax free. So you could put $10,000 into a municipal-bond fund like Eaton Vance National Municipals, which is yielding well over 5%. You could put another $10,000 into inflation-protected Treasurys, also known as TIPS, which are still reasonably priced. Vanguard's Inflation-Protected Securities is one of the best-known funds. And you might round out your bond holdings by putting $10,000 into a flexible bond fund, like Loomis Sayles Bond, that can pick up opportunities anywhere. Veteran manager Dan Fuss sees some of the best bargains in investment-grade corporate bonds.
Let's then say you still want the bulk of your investments exposed to the world's stock markets. That is, after all, where most money is traditionally made over the long term.
But you might be looking for smart managers who have flexibility to hold cash, protect against market falls, ignore landmines, and grab opportunities where they see them.
You can pick several managers and invest $10,000 with each. Two funds I happen to own are Quaker Strategic Growth (QUAGX) and Fairholme. Both have good long-term records. There are plenty of other good ones out there. Fresh investors might prefer manager Manu Daftary's newer fund, Quaker Global Total Return, which is smaller and has even more flexibility than his Quaker Strategic Growth.
Another good holding might be Diamond-Hill Long-Short, a fund that operates a bit like a hedge fund and seeks to produce good returns in any market.
A fourth might be Gateway, which has a long record of producing good returns with pretty low volatility: For decades, this fund has held equities and sold call options against its holdings to generate income.
You could add further strings to your bow by investing $10,000 each in, say, Japanese equities, emerging markets, and maybe commodities. Examples for the first two might be T. Rowe Price Japan and Vanguard's Emerging Markets Stock Index fund.
On commodities, you've got a pretty broad range of options. You can invest in assets themselves, or the companies that produce them. An example of the former is the streetTracks Gold Trust, an exchange-traded fund that tracks the gold price.
You might reason that gold looked a lot more interesting eight years ago, when it was $250 an ounce and no one was talking about it, than it does now, when it's nearly $900 an ounce and no one will stop talking about it.
As a novice, you might instead decide to place your tenth chip on managed timber, an asset with an excellent long-term track record of producing solid returns. Fund legend Jeremy Grantham, along with the managers of Harvard University's endowment, have been fans recently. One possible route would be to buy shares in Plum Creek, the blue-chip stock in the sector. It's a real-estate investment trust that owns timberland. A caveat: This, too, has risen quite a distance. It's nearly trebled in ten years.
Past performance is no guide to the future, of course. Nonetheless when I checked out how this portfolio would have fared during the turmoil of this decade, it stacked up pretty well.
I could only trace it back to August 2000, when several of these funds were launched. (and I could only include Diamond Hill from its launch in December).
But from August 31, 2000 through this week, with dividends reinvested, this portfolio would have gained about 61%. Wall Street overall, by contrast, is down about 21% over that period.
And this portfolio would have let you sleep a lot easier, too. Through the crash of 2000-2003 it fell just 5%, while the wider market nearly halved.
Almost nothing has been spared in the incredible worldwide crash of the last year. But this portfolio has only fallen 24% from the peak, while Wall Street overall has fallen about 35%.
Like I said, this is only an exercise and an illustration. Anyone can put together a pretty broadly diversified portfolio these days. There are an infinite number of varieties.
You could, for example, replace one of the equity funds above with one specializing in international small cap stocks, like Oakmark International Small Cap (OAKEX). They've been absolutely crushed in the last year and there are plenty of bargains to be had.
Or you could pick some other active fund managers, like Ken Heebner at CGM Focus, or Marty Whitman at Third Avenue Value, or even Warren Buffett at Berkshire Hathaway.
Or you could replace a couple of the investments with closed-end funds trading at big discounts to their net assets. The BlackRock S&P Quality Rankings Global Equity Managed Trust, which invests in top quality blue-chip stocks, is selling for 19% below net asset value. Clough Global Opportunities, a well-managed global investment fund mentioned here before, is an incredible 29% below.
The positive side to this crash is that lots of these investment options are now going cheap. That makes it easier to rebalance your portfolio into something more broadly based, and, one hopes, stable.
Write to Brett Arends at brett.arends@wsj.com
How Bernie Madoff Made Smart Folks Look Dumb
THE INTELLIGENT INVESTOR
DECEMBER 13, 2008
How Bernie Madoff Made Smart Folks Look Dumb
By JASON ZWEIG
What do George Carlin and Bernard Madoff have in common?
The late comedian immortalized oxymorons, those absurd word pairs like "jumbo shrimp" and "military intelligence." Mr. Madoff just put the silliest of all financial oxymorons into the spotlight: "sophisticated investor."
The accounts managed by Bernard L. Madoff Investment Securities LLC reported gains of roughly 1% a month like clockwork, with nary a loss, for two decades. Why did that freakishly smooth return not set off alarms among current and prospective investors?
Of all people, sophisticated investors like Mr. Madoff's clients should know that if something sounds too good to be true, then it's not. But they believed it anyway. Why?
Mr. Madoff emphasized secrecy, lending his investment accounts a mysterious allure and sense of exclusivity. The initial marketing often was in the hands of what one source described as "a macher" (the Yiddish term for a big shot). At the country club or another exclusive rendezvous, the macher would brag, "I've got my money invested with Madoff and he's doing really well." When his listener expressed interest, the macher would reply, "You can't get in unless you're invited...but I can probably get you in."
Robert Cialdini, a psychology professor at Arizona State University and author of "Influence: Science and Practice," calls this strategy "a triple-threat combination." The "murkiness" of a hedge fund, he says, makes investors feel that it is "the inherent domain of people who know more than we do." This uncertainty leads us to look for social proof: evidence that other people we trust have already decided to invest. And by playing up how exclusive his funds were, Mr. Madoff shifted investors' fears from the risk that they might lose money to the risk they might lose out on making money.
If you did get invited in, then you were anointed a member of this particular club of "sophisticated investors." Once someone you respect went out of his way to grant you access, says Prof. Cialdini, it would seem almost an "insult" to do any further investigation. Mr. Madoff also was known to throw investors out of his funds for asking too many questions, so no one wanted to rock the boat.
This members-only feeling blinded many buyers of Mr. Madoff's funds to the numerous red flags fluttering around his operation. When you are in an exclusive private club, you do not go rummaging around in the kitchen to make sure that the health code is being followed.
Here we have the biggest dirty secret of the "sophisticated investor": Due diligence often goes undone. For a brief window in 2006, the Securities and Exchange Commission required hedge funds to file standardized disclosure forms. William Goetzmann, a finance professor at Yale School of Management, found that hedge funds disclosing legal or regulatory problems and conflicts of interest ended up with lower future performance. But the disclosure of these risks had no impact at all on how much money flowed into the hedge funds.
In other words, investors were getting useful information -- and paying no attention to it. Amaranth Advisors LLC, the commodity hedge fund that collapsed in 2006 with $6 billion in losses, did not even file the required SEC form at the beginning of that year, a clear signal that something might be wrong. Instead of standing pat or pulling money out, investors poured more money in.
Last year, the Greenwich Roundtable, a nonprofit that researches alternative investments, conducted a survey of consultants, pension plans, "family offices," funds of funds and other large investors who shop for hedge funds. It's hard to imagine a more sophisticated crowd.
Yet one out of five investors in the survey reported that they "always follow" not a formal checklist or analytical procedure, but rather "an informal process" of due diligence.
That's for sure.
If you invest with anyone who claims never to lose money, reports amazingly smooth returns, will not explain his strategy, refuses to disclose basic information or discuss potential risks, you're not sophisticated. You're an oxymoron.
Email: intelligentinvestor@wsj.com
http://online.wsj.com/article/SB122912266389002855.html
DECEMBER 13, 2008
How Bernie Madoff Made Smart Folks Look Dumb
By JASON ZWEIG
What do George Carlin and Bernard Madoff have in common?
The late comedian immortalized oxymorons, those absurd word pairs like "jumbo shrimp" and "military intelligence." Mr. Madoff just put the silliest of all financial oxymorons into the spotlight: "sophisticated investor."
The accounts managed by Bernard L. Madoff Investment Securities LLC reported gains of roughly 1% a month like clockwork, with nary a loss, for two decades. Why did that freakishly smooth return not set off alarms among current and prospective investors?
Of all people, sophisticated investors like Mr. Madoff's clients should know that if something sounds too good to be true, then it's not. But they believed it anyway. Why?
Mr. Madoff emphasized secrecy, lending his investment accounts a mysterious allure and sense of exclusivity. The initial marketing often was in the hands of what one source described as "a macher" (the Yiddish term for a big shot). At the country club or another exclusive rendezvous, the macher would brag, "I've got my money invested with Madoff and he's doing really well." When his listener expressed interest, the macher would reply, "You can't get in unless you're invited...but I can probably get you in."
Robert Cialdini, a psychology professor at Arizona State University and author of "Influence: Science and Practice," calls this strategy "a triple-threat combination." The "murkiness" of a hedge fund, he says, makes investors feel that it is "the inherent domain of people who know more than we do." This uncertainty leads us to look for social proof: evidence that other people we trust have already decided to invest. And by playing up how exclusive his funds were, Mr. Madoff shifted investors' fears from the risk that they might lose money to the risk they might lose out on making money.
If you did get invited in, then you were anointed a member of this particular club of "sophisticated investors." Once someone you respect went out of his way to grant you access, says Prof. Cialdini, it would seem almost an "insult" to do any further investigation. Mr. Madoff also was known to throw investors out of his funds for asking too many questions, so no one wanted to rock the boat.
This members-only feeling blinded many buyers of Mr. Madoff's funds to the numerous red flags fluttering around his operation. When you are in an exclusive private club, you do not go rummaging around in the kitchen to make sure that the health code is being followed.
Here we have the biggest dirty secret of the "sophisticated investor": Due diligence often goes undone. For a brief window in 2006, the Securities and Exchange Commission required hedge funds to file standardized disclosure forms. William Goetzmann, a finance professor at Yale School of Management, found that hedge funds disclosing legal or regulatory problems and conflicts of interest ended up with lower future performance. But the disclosure of these risks had no impact at all on how much money flowed into the hedge funds.
In other words, investors were getting useful information -- and paying no attention to it. Amaranth Advisors LLC, the commodity hedge fund that collapsed in 2006 with $6 billion in losses, did not even file the required SEC form at the beginning of that year, a clear signal that something might be wrong. Instead of standing pat or pulling money out, investors poured more money in.
Last year, the Greenwich Roundtable, a nonprofit that researches alternative investments, conducted a survey of consultants, pension plans, "family offices," funds of funds and other large investors who shop for hedge funds. It's hard to imagine a more sophisticated crowd.
Yet one out of five investors in the survey reported that they "always follow" not a formal checklist or analytical procedure, but rather "an informal process" of due diligence.
That's for sure.
- One out of four investors surveyed will write a check without having studied the financial statements of the fund.
- Nearly one in three will not always run a background check on fund managers;
- 6% may not even read the prospectus before ever committing money.
If you invest with anyone who claims never to lose money, reports amazingly smooth returns, will not explain his strategy, refuses to disclose basic information or discuss potential risks, you're not sophisticated. You're an oxymoron.
Email: intelligentinvestor@wsj.com
http://online.wsj.com/article/SB122912266389002855.html
Cash Is Looking Better As Investment
INVESTING
OCTOBER 8, 2008, 4:18 P.M. ET
Cash Is Looking Better As Investment
As the market pushes investors beyond their comfort zones, cash and cash-equivalent investments -- traditionally stodgy options for advisors -- are gaining appeal.
By SUZANNE BARLYN
Cash and cash-equivalent investments - traditionally stodgy options for advisors - are gaining appeal as extreme market volatility pushes many clients beyond their comfort zones.
Advisors typically suggest that clients limit cash exposure to between 5% and 10% of their portfolios, or maintain a reserve that is equivalent to between 18 and 24 months of living expenses, in the event of a bear market. But some advisors are increasing their clients' cash holdings and exposure to other "cashlike" short-term investments, particularly to U.S. Treasurys, a safe haven in a brutal market.
"Cash is looking better for a few different reasons," says Donald B. Cummings Jr., an investment advisor with Blue Haven Capital in Geneva, Ill. Cummings says he was concerned that some municipal money-market funds would potentially "break the buck" - or fall below $1 per share. He preemptively moved client funds into plain-vanilla U.S. Treasury money-market funds. Cummings recognizes that Treasury yields are low. For example, the current seven-day yield for the Dreyfus 100% U.S. Treasury Money Market Fund (DUSXX) is 0.51%. However, the strategy is more tolerable for the short term, he says.
"People expect volatility, but no one wants to lose three and four percent on their money-market funds," says Cummings. He's not entirely sold on the Treasury Department's temporary guarantee program for money-market funds, he says, which protects certain shareholders of money-market mutual funds from losses if their funds are unable to maintain a $1 net asset value. The program offers protection for money-market holdings valued as of Sept. 19. Cummings says he's concerned about jeopardizing funds deposited after that time. "We're telling everyone to hold tight for a few months and see how this plays out," he says.
Advisors are also being judicious about investing new cash from clients since the bear market onset in October 2007. Cathy Curtis, a financial planner based on Oakland, Calif., says she's been particularly cautious with several new clients she took on last October, when the market started its decline, whose accounts average about $500,000. Curtis says she invested about 50% of their money at the time and left the rest in cash, including the Schwab Value Advantage Money Fund (SWBXX). "I have been investing it slowly - even over the last month," she says - about $2,500 at a time.
Cummings is stretching cash that he'd normally invest within about a month across a four- to five-month span. He stashes funds that he plans to invest at a later time in pre-refunded municipal bonds - a high-quality municipal bond in which the income and principal is typically insured by an irrevocable trust of U.S. securities. Cummings says that tax-free yields are between 1.5% to 2.5% - significantly better than U.S. Treasurys. A three-month T-bill, for example, currently yields 0.75%. "There are places to hide on the short end of the curve that make a lot of financial sense," he says.
Some advisors are also considering their clients' sense of well-being. "It's important that people feel safe and that they're going to have some liquidity," says Pran Tiku, a wealth manager for Peak Financial Management Inc. in Waltham, Mass. He's raising cash by selling off lower-quality, higher-yielding bonds, which are typically viewed unfavorably by bond-rating agencies. "If the credit crunch is as ominous as it seems and does not have a resolution, then cash becomes a very important investment to hold," he says.
Tiku has been investing the cash in short-term bonds, such as short-term Treasurys and government instruments, as well as money-market funds. A 5% minimum of clients' balanced portfolios is typically held in cash and cashlike investments. But Tiku has increased the allocation to about 30%. He's decreased bond allocations to 7% from about 30%.
For Doug DeGroote, managing director of United Wealth Management in Westlake Village, Calif., increasing his cash allocation serves another purpose. "We're sitting in a more liquid stance and looking for [buying] opportunities. It's being prepared for a chance to move money back into the market," he says.
DeGroote says he converted low-yielding short-term bonds to cash in preparation to snag good deals. DeGroote's firm typically allocates between 5% and 10% of client portfolios in cash, However, the figure is presently closer to 20%, he says.
Not all advisors are completely sold, however. Mark Colgan, president of Colgan Capital in Pittsford, N.Y., says he modifies his plan only after a client calls on three occasions and expresses extreme anxiety - indicating a client's lack of risk tolerance. If the client is a retiree, Colgan will then build a small cash position of between 12 and 24 months' worth of withdrawals to ride out the bear market. But he urges younger clients to stay the course. "For me, it is more about aligning the client with the proper portfolio - not reacting to the markets," he says.
Laura Mattia, an advisor with Baron Financial Group in Fair Lawn, N.J., says the firm adopts an "all-weather strategy" with clients early on and doesn't waver. Mattia and her colleagues typically limit cash exposure to 18 months of a client's personal expenses. "All of these assets will come back. They are going to rebound," she says. "The day when the stock market goes up 800 points is when people are going to be sitting there in cash saying I should have, would have could have."
Write to Suzanne Barlyn at suzanne.barlyn@wsj.com
http://online.wsj.com/article/SB122349648494716461.html
OCTOBER 8, 2008, 4:18 P.M. ET
Cash Is Looking Better As Investment
As the market pushes investors beyond their comfort zones, cash and cash-equivalent investments -- traditionally stodgy options for advisors -- are gaining appeal.
By SUZANNE BARLYN
Cash and cash-equivalent investments - traditionally stodgy options for advisors - are gaining appeal as extreme market volatility pushes many clients beyond their comfort zones.
Advisors typically suggest that clients limit cash exposure to between 5% and 10% of their portfolios, or maintain a reserve that is equivalent to between 18 and 24 months of living expenses, in the event of a bear market. But some advisors are increasing their clients' cash holdings and exposure to other "cashlike" short-term investments, particularly to U.S. Treasurys, a safe haven in a brutal market.
"Cash is looking better for a few different reasons," says Donald B. Cummings Jr., an investment advisor with Blue Haven Capital in Geneva, Ill. Cummings says he was concerned that some municipal money-market funds would potentially "break the buck" - or fall below $1 per share. He preemptively moved client funds into plain-vanilla U.S. Treasury money-market funds. Cummings recognizes that Treasury yields are low. For example, the current seven-day yield for the Dreyfus 100% U.S. Treasury Money Market Fund (DUSXX) is 0.51%. However, the strategy is more tolerable for the short term, he says.
"People expect volatility, but no one wants to lose three and four percent on their money-market funds," says Cummings. He's not entirely sold on the Treasury Department's temporary guarantee program for money-market funds, he says, which protects certain shareholders of money-market mutual funds from losses if their funds are unable to maintain a $1 net asset value. The program offers protection for money-market holdings valued as of Sept. 19. Cummings says he's concerned about jeopardizing funds deposited after that time. "We're telling everyone to hold tight for a few months and see how this plays out," he says.
Advisors are also being judicious about investing new cash from clients since the bear market onset in October 2007. Cathy Curtis, a financial planner based on Oakland, Calif., says she's been particularly cautious with several new clients she took on last October, when the market started its decline, whose accounts average about $500,000. Curtis says she invested about 50% of their money at the time and left the rest in cash, including the Schwab Value Advantage Money Fund (SWBXX). "I have been investing it slowly - even over the last month," she says - about $2,500 at a time.
Cummings is stretching cash that he'd normally invest within about a month across a four- to five-month span. He stashes funds that he plans to invest at a later time in pre-refunded municipal bonds - a high-quality municipal bond in which the income and principal is typically insured by an irrevocable trust of U.S. securities. Cummings says that tax-free yields are between 1.5% to 2.5% - significantly better than U.S. Treasurys. A three-month T-bill, for example, currently yields 0.75%. "There are places to hide on the short end of the curve that make a lot of financial sense," he says.
Some advisors are also considering their clients' sense of well-being. "It's important that people feel safe and that they're going to have some liquidity," says Pran Tiku, a wealth manager for Peak Financial Management Inc. in Waltham, Mass. He's raising cash by selling off lower-quality, higher-yielding bonds, which are typically viewed unfavorably by bond-rating agencies. "If the credit crunch is as ominous as it seems and does not have a resolution, then cash becomes a very important investment to hold," he says.
Tiku has been investing the cash in short-term bonds, such as short-term Treasurys and government instruments, as well as money-market funds. A 5% minimum of clients' balanced portfolios is typically held in cash and cashlike investments. But Tiku has increased the allocation to about 30%. He's decreased bond allocations to 7% from about 30%.
For Doug DeGroote, managing director of United Wealth Management in Westlake Village, Calif., increasing his cash allocation serves another purpose. "We're sitting in a more liquid stance and looking for [buying] opportunities. It's being prepared for a chance to move money back into the market," he says.
DeGroote says he converted low-yielding short-term bonds to cash in preparation to snag good deals. DeGroote's firm typically allocates between 5% and 10% of client portfolios in cash, However, the figure is presently closer to 20%, he says.
Not all advisors are completely sold, however. Mark Colgan, president of Colgan Capital in Pittsford, N.Y., says he modifies his plan only after a client calls on three occasions and expresses extreme anxiety - indicating a client's lack of risk tolerance. If the client is a retiree, Colgan will then build a small cash position of between 12 and 24 months' worth of withdrawals to ride out the bear market. But he urges younger clients to stay the course. "For me, it is more about aligning the client with the proper portfolio - not reacting to the markets," he says.
Laura Mattia, an advisor with Baron Financial Group in Fair Lawn, N.J., says the firm adopts an "all-weather strategy" with clients early on and doesn't waver. Mattia and her colleagues typically limit cash exposure to 18 months of a client's personal expenses. "All of these assets will come back. They are going to rebound," she says. "The day when the stock market goes up 800 points is when people are going to be sitting there in cash saying I should have, would have could have."
Write to Suzanne Barlyn at suzanne.barlyn@wsj.com
http://online.wsj.com/article/SB122349648494716461.html
Welcome to a buyer's market without buyers
Joe Investor, the Markets Are All Yours Now
By JASON ZWEIG
Article
Video
The tables have turned.
For the past couple of decades, the markets have been dominated by institutional investors who devoured bargains so fast and in such bulk that individual investors were usually left, at best, with a few scraps.
But pension funds, hedge funds, mutual funds and other institutions are under siege as their portfolios implode and investors redeem their shares, forcing the fund managers to raise cash.
Advantage Goes to the Individual Investor
Personal Finance columnist Jason Zweig explains why individuals have a big advantage over institutional investors in the market right now. (Nov. 14)
Virtually every investment that carries any risk is on sale. Stocks and bonds, at home and abroad, have had their prices slashed by up to 45% this year. Yet at the very moment when bargains abound, many of the giants who normally would buy can do nothing but sell.
Welcome to a buyer's market without buyers.
This is a huge change for the little guys. Rob Arnott, who oversees $35 billion at Research Affiliates LLC in Newport Beach, Calif., puts it this way: "The question that hardly anyone ever thinks about is: Who's on the other side of my trade, and why are they willing to be losers if I'm going to be a winner?" Ever since the 1970s, the person on the other side of your trade has almost always been someone who manages billions of dollars and has millions of dollars to spend on gathering more information than most individuals ever could. Now, however, as Mr. Arnott says, "You can -- and probably do -- have a counterparty on the other side of your trade who absolutely has to sell, perhaps at any price."
You would be very wise to give these distressed sellers a little bit of your cash, which they overvalue, in exchange for some of the stocks and bonds that they are undervaluing. Sooner rather than later, institutions will no longer need to beg for cash, they will regain the upper hand over individuals, and the tables will turn again.
While blue-chip stocks are still cheap, as I've said many times lately, there are some areas where the liquidity drought borders on desperation.
Corporate bonds.
A year ago, corporate bonds outyielded Treasurys by 1.6 percentage points; now, the spread is more than five. Top-quality corporate debt is yielding 7% and up. Consider cheap, well-run funds like Harbor Bond, Loomis Sayles Bond or . Convertible bonds are yielding 12% and more; here, the easiest choice is Vanguard Convertible Securities.
Municipal bonds.
The tax-free securities issued by state and local governments have gotten so cheap that in many cases you would have to earn 7% or 8% before tax to match their yield. Vanguard, T. Rowe Price and Fidelity offer a wide range of muni funds at low cost.
Emerging markets.
Stocks and bonds in the developing world have been decimated. Emerging-market stocks have fallen nearly 60% in 2008. The bonds have dropped about 20%, producing the highest yields in about a decade. For stocks, Vanguard Emerging Markets ETF is a good choice; T. Rowe Price Emerging Markets Bond fund is a solid way to play the debt.
TIPS.
Larry Swedroe of Buckingham Asset Management in St. Louis recently bought 8-year Treasury Inflation-Protected Securities with a yield of 3.7%. "That is crazy," he marvels, since the same day the 5-year TIPS yielded 2.6% and the 10-year yielded 2.7%. Such fat yields in excess of inflation on a risk-free investment are a rare opportunity. Put TIPS in a tax-free retirement account; learn more at www.treasurydirect.gov.
Closed-end funds.
These neglected fund/stock hybrids are at their cheapest in years. Closed-ends often trade at a discount to the market value of their holdings. In many cases, you now can get $1 in assets for 85 cents. That augments the yield on funds that hold corporate or municipal bonds. A handy starting point for research is www.closed-endfunds.com. Be sure the fund is "unleveraged," meaning that it does not borrow money, and avoid any fund with annual expenses over 1%.
Real estate.
REITs, or real-estate investment trusts, have been gutted in the housing crisis, losing more than 40% so far this year after an 18% drop in 2007. Many REITs are now priced as if people and businesses will never again want roofs over their heads. The safest choice: a basket holding dozens of real-estate bundles, like Vanguard REIT Index fund.
Finally, if you have cash and courage, consider a vacation property or second home. Nearly two-thirds of the condominiums built in and around Myrtle Beach, S.C. during the boom remain unsold as of June, says the National Association of Home Builders. A similar supply glut has clogged markets in other getaways like Tampa, Fla., and San Diego. With due diligence, you could get both a high financial and a high psychic return.
Email: intelligentinvestor@wsj.com.
By JASON ZWEIG
Article
Video
The tables have turned.
For the past couple of decades, the markets have been dominated by institutional investors who devoured bargains so fast and in such bulk that individual investors were usually left, at best, with a few scraps.
But pension funds, hedge funds, mutual funds and other institutions are under siege as their portfolios implode and investors redeem their shares, forcing the fund managers to raise cash.
Advantage Goes to the Individual Investor
Personal Finance columnist Jason Zweig explains why individuals have a big advantage over institutional investors in the market right now. (Nov. 14)
Virtually every investment that carries any risk is on sale. Stocks and bonds, at home and abroad, have had their prices slashed by up to 45% this year. Yet at the very moment when bargains abound, many of the giants who normally would buy can do nothing but sell.
Welcome to a buyer's market without buyers.
This is a huge change for the little guys. Rob Arnott, who oversees $35 billion at Research Affiliates LLC in Newport Beach, Calif., puts it this way: "The question that hardly anyone ever thinks about is: Who's on the other side of my trade, and why are they willing to be losers if I'm going to be a winner?" Ever since the 1970s, the person on the other side of your trade has almost always been someone who manages billions of dollars and has millions of dollars to spend on gathering more information than most individuals ever could. Now, however, as Mr. Arnott says, "You can -- and probably do -- have a counterparty on the other side of your trade who absolutely has to sell, perhaps at any price."
You would be very wise to give these distressed sellers a little bit of your cash, which they overvalue, in exchange for some of the stocks and bonds that they are undervaluing. Sooner rather than later, institutions will no longer need to beg for cash, they will regain the upper hand over individuals, and the tables will turn again.
While blue-chip stocks are still cheap, as I've said many times lately, there are some areas where the liquidity drought borders on desperation.
Corporate bonds.
A year ago, corporate bonds outyielded Treasurys by 1.6 percentage points; now, the spread is more than five. Top-quality corporate debt is yielding 7% and up. Consider cheap, well-run funds like Harbor Bond, Loomis Sayles Bond or . Convertible bonds are yielding 12% and more; here, the easiest choice is Vanguard Convertible Securities.
Municipal bonds.
The tax-free securities issued by state and local governments have gotten so cheap that in many cases you would have to earn 7% or 8% before tax to match their yield. Vanguard, T. Rowe Price and Fidelity offer a wide range of muni funds at low cost.
Emerging markets.
Stocks and bonds in the developing world have been decimated. Emerging-market stocks have fallen nearly 60% in 2008. The bonds have dropped about 20%, producing the highest yields in about a decade. For stocks, Vanguard Emerging Markets ETF is a good choice; T. Rowe Price Emerging Markets Bond fund is a solid way to play the debt.
TIPS.
Larry Swedroe of Buckingham Asset Management in St. Louis recently bought 8-year Treasury Inflation-Protected Securities with a yield of 3.7%. "That is crazy," he marvels, since the same day the 5-year TIPS yielded 2.6% and the 10-year yielded 2.7%. Such fat yields in excess of inflation on a risk-free investment are a rare opportunity. Put TIPS in a tax-free retirement account; learn more at www.treasurydirect.gov.
Closed-end funds.
These neglected fund/stock hybrids are at their cheapest in years. Closed-ends often trade at a discount to the market value of their holdings. In many cases, you now can get $1 in assets for 85 cents. That augments the yield on funds that hold corporate or municipal bonds. A handy starting point for research is www.closed-endfunds.com. Be sure the fund is "unleveraged," meaning that it does not borrow money, and avoid any fund with annual expenses over 1%.
Real estate.
REITs, or real-estate investment trusts, have been gutted in the housing crisis, losing more than 40% so far this year after an 18% drop in 2007. Many REITs are now priced as if people and businesses will never again want roofs over their heads. The safest choice: a basket holding dozens of real-estate bundles, like Vanguard REIT Index fund.
Finally, if you have cash and courage, consider a vacation property or second home. Nearly two-thirds of the condominiums built in and around Myrtle Beach, S.C. during the boom remain unsold as of June, says the National Association of Home Builders. A similar supply glut has clogged markets in other getaways like Tampa, Fla., and San Diego. With due diligence, you could get both a high financial and a high psychic return.
Email: intelligentinvestor@wsj.com.
Is Your AIG Insurance Policy Safe?
Is Your AIG Insurance Policy Safe?
Will the struggling insurer be able to meet its financial obligations? Here's what you need to know.
By BRETT ARENDS
People are in a panic about AIG. In the last 24 hours I have been swamped with emails from anxious readers around America who want to know: Is my mom's retirement annuity safe? Is grandma's long-term care insurance policy safe? Is my car or homeowner's policy OK?
Here's what you need to know.
There are three separate barriers between your policy and the AIG crisis that you're hearing about on TV.
1. The AIG that's in crisis and the one that wrote your insurance policy are to a large degree separate companies. The AIG on Wall Street is an umbrella company that owns the stock in a lot of smaller insurance subsidiaries. But your policy is held with the subsidiary in your state. They are tightly regulated, they are required to hold conservative assets to back up your policy, and those assets are walled off from the troubles at the parent company. It is perfectly possible for AIG to file for chapter 11 and your policy to be OK.
2. Even if your local AIG subsidiary got into financial difficulties, there's a second level of protection for policyholders. Your state insurance commissioner would step in and take over the company and run it in the interests of policyholders. Under the law, policyholders should get back 100 cents on the dollar before the company's other creditors can get a penny.
3. And even if those first two steps didn't cover you completely, there's a third protection: your local state guaranty funds. These are pools of money put together by insurance companies to provide a backstop. As a general rule of thumb, you're covered to at least $100,000 on most policies and $300,000 on life insurance death benefits. The levels may be even higher in your state.
No system is perfect. It is understandable that people are nervous. Anything shaking their insurance provider is going to rattle their confidence. But at least insurance customers have some protections to help them.
There may be one more protection as well. AIG is simply too big to be allowed to fail. If the worst came to the worst, the federal government could let the stock and bondholders lose their money. But it would be a monumental blunder of the first order to let the policyholders lose. These are people on Main Street, not Wall Street. There are hundreds of thousands of them, perhaps millions. Oh yes -- and they vote.
Write to Brett Arends at brett.arends@wsj.com
http://online.wsj.com/article/SB122159859013744663.html
Will the struggling insurer be able to meet its financial obligations? Here's what you need to know.
By BRETT ARENDS
People are in a panic about AIG. In the last 24 hours I have been swamped with emails from anxious readers around America who want to know: Is my mom's retirement annuity safe? Is grandma's long-term care insurance policy safe? Is my car or homeowner's policy OK?
Here's what you need to know.
There are three separate barriers between your policy and the AIG crisis that you're hearing about on TV.
1. The AIG that's in crisis and the one that wrote your insurance policy are to a large degree separate companies. The AIG on Wall Street is an umbrella company that owns the stock in a lot of smaller insurance subsidiaries. But your policy is held with the subsidiary in your state. They are tightly regulated, they are required to hold conservative assets to back up your policy, and those assets are walled off from the troubles at the parent company. It is perfectly possible for AIG to file for chapter 11 and your policy to be OK.
2. Even if your local AIG subsidiary got into financial difficulties, there's a second level of protection for policyholders. Your state insurance commissioner would step in and take over the company and run it in the interests of policyholders. Under the law, policyholders should get back 100 cents on the dollar before the company's other creditors can get a penny.
3. And even if those first two steps didn't cover you completely, there's a third protection: your local state guaranty funds. These are pools of money put together by insurance companies to provide a backstop. As a general rule of thumb, you're covered to at least $100,000 on most policies and $300,000 on life insurance death benefits. The levels may be even higher in your state.
No system is perfect. It is understandable that people are nervous. Anything shaking their insurance provider is going to rattle their confidence. But at least insurance customers have some protections to help them.
There may be one more protection as well. AIG is simply too big to be allowed to fail. If the worst came to the worst, the federal government could let the stock and bondholders lose their money. But it would be a monumental blunder of the first order to let the policyholders lose. These are people on Main Street, not Wall Street. There are hundreds of thousands of them, perhaps millions. Oh yes -- and they vote.
Write to Brett Arends at brett.arends@wsj.com
http://online.wsj.com/article/SB122159859013744663.html
Giving Your Stock Portfolio a Year-End Face Lift
Giving Your Stock Portfolio a Year-End Face Lift
By JASON ZWEIG
'Tis the season to dump last year's folly.
The market meltdown of 2008 gives you the rare opportunity for a triple whammy: You can transform your losers into winners, remain fully invested and cut your tax bill to boot.
Plus, you earn the satisfaction of taking action when so much of your investing destiny otherwise seems to be out of your hands. Yet these actions, unlike such drastic steps as dumping all your stocks, are very likely to leave you better off in the long run.
That makes this month the ideal time to beautify even the most battered portfolio.
Of course, it is hard to make peace with your losses. Selling a loser forces you to admit a mistake; it also forces you to make what might be a second mistake. What if you move the money into something that does even worse? Hamlet was right: We would "rather bear those ills we have than fly to others that we know not of."
To ease the pain of selling a loser, replace it with something that feels similar. Say you bought 100 shares of Exxon Mobil in October 2007 at $95. Your $9,500 investment is now worth less than $7,700. Sell Exxon Mobil and immediately buy another energy stock. A recent study by investment strategist James Montier of Société Générale in London finds that Chevron, ConocoPhillips, Marathon Oil, Tesoro and Valero Energy all meet several of the standards for investment value set years ago by the great analyst Benjamin Graham.
Better yet, sell Exxon Mobil and put the proceeds into a basket of oil stocks like Energy Select Sector SPDR or Vanguard Energy ETF. This way, you decrease your risk by increasing your diversification, yet you maintain 100% of your exposure to energy stocks while they are on sale.
In each case, you can use the $1,800 loss to reduce your tax bill by offsetting capital gains you may have elsewhere now or in the future. That would become even more valuable if the Obama administration raises the tax rates on capital gains.
There are other ways to clean up by cleaning up. Say you own an index fund that holds all the companies in the Standard & Poor's 500. Sell at a loss, buy a total stock market index fund that holds everything in the Dow Jones Wilshire 5000 index, and voilà : less risk, more diversification, equal exposure to stocks and a lower tax bill.
Just be sure the new fund isn't what the IRS regards as "substantially identical" to the old one; so long as it tracks a different index you should be fine, says James A. Seidel of the tax and accounting business at Thomson Reuters.
Next, consider cleaning up your individual retirement account. If your adjusted gross income won't exceed $100,000 this year (and you don't file a separate married return), you can convert a traditional IRA to a Roth IRA.
The bear market has shriveled not just the value of your old IRA but also the tax liability you will incur on the conversion. "Converting makes more sense now than it has at any point in history," says Gary Schatsky, a financial planner in New York. An IRA that was worth $50,000 a year ago may be worth only $30,000 today; switch to a Roth now, and you cut your conversion taxes roughly 40% below what they would have been in 2007.
That smaller hit today means much bigger savings tomorrow. In general, once you convert to a Roth, all future withdrawals from the account are tax-free to you -- and to your heirs.
Finally, if you already converted a traditional IRA to a Roth earlier this year thinking the market had bottomed, don't just lick your wounds; call a do-over. Remarkably, you can transform your Roth back to a traditional IRA. Instruct the trustee of your account (your bank, broker or fund company) to "recharacterize" the IRA. That erases your original conversion and the taxes you would have owed on it.
Then wait 30 days after the recharacterization date and convert again to a Roth. Chances are, the market will be in the dumps next month, too, enabling you to convert at an even more opportune price this time.
For more guidance on tax swaps and Roth moves, see IRS Publications 550 and 590 (www.irs.gov/publications); be sure to walk through the requirements with your tax adviser to confirm that you qualify. You wouldn't want to miss out on the chance to clean up by year's end, but you wouldn't want to mess it up, either.
Write to Jason Zweig at intelligentinvestor@wsj.com
By JASON ZWEIG
'Tis the season to dump last year's folly.
The market meltdown of 2008 gives you the rare opportunity for a triple whammy: You can transform your losers into winners, remain fully invested and cut your tax bill to boot.
Plus, you earn the satisfaction of taking action when so much of your investing destiny otherwise seems to be out of your hands. Yet these actions, unlike such drastic steps as dumping all your stocks, are very likely to leave you better off in the long run.
That makes this month the ideal time to beautify even the most battered portfolio.
Of course, it is hard to make peace with your losses. Selling a loser forces you to admit a mistake; it also forces you to make what might be a second mistake. What if you move the money into something that does even worse? Hamlet was right: We would "rather bear those ills we have than fly to others that we know not of."
To ease the pain of selling a loser, replace it with something that feels similar. Say you bought 100 shares of Exxon Mobil in October 2007 at $95. Your $9,500 investment is now worth less than $7,700. Sell Exxon Mobil and immediately buy another energy stock. A recent study by investment strategist James Montier of Société Générale in London finds that Chevron, ConocoPhillips, Marathon Oil, Tesoro and Valero Energy all meet several of the standards for investment value set years ago by the great analyst Benjamin Graham.
Better yet, sell Exxon Mobil and put the proceeds into a basket of oil stocks like Energy Select Sector SPDR or Vanguard Energy ETF. This way, you decrease your risk by increasing your diversification, yet you maintain 100% of your exposure to energy stocks while they are on sale.
In each case, you can use the $1,800 loss to reduce your tax bill by offsetting capital gains you may have elsewhere now or in the future. That would become even more valuable if the Obama administration raises the tax rates on capital gains.
There are other ways to clean up by cleaning up. Say you own an index fund that holds all the companies in the Standard & Poor's 500. Sell at a loss, buy a total stock market index fund that holds everything in the Dow Jones Wilshire 5000 index, and voilà : less risk, more diversification, equal exposure to stocks and a lower tax bill.
Just be sure the new fund isn't what the IRS regards as "substantially identical" to the old one; so long as it tracks a different index you should be fine, says James A. Seidel of the tax and accounting business at Thomson Reuters.
Next, consider cleaning up your individual retirement account. If your adjusted gross income won't exceed $100,000 this year (and you don't file a separate married return), you can convert a traditional IRA to a Roth IRA.
The bear market has shriveled not just the value of your old IRA but also the tax liability you will incur on the conversion. "Converting makes more sense now than it has at any point in history," says Gary Schatsky, a financial planner in New York. An IRA that was worth $50,000 a year ago may be worth only $30,000 today; switch to a Roth now, and you cut your conversion taxes roughly 40% below what they would have been in 2007.
That smaller hit today means much bigger savings tomorrow. In general, once you convert to a Roth, all future withdrawals from the account are tax-free to you -- and to your heirs.
Finally, if you already converted a traditional IRA to a Roth earlier this year thinking the market had bottomed, don't just lick your wounds; call a do-over. Remarkably, you can transform your Roth back to a traditional IRA. Instruct the trustee of your account (your bank, broker or fund company) to "recharacterize" the IRA. That erases your original conversion and the taxes you would have owed on it.
Then wait 30 days after the recharacterization date and convert again to a Roth. Chances are, the market will be in the dumps next month, too, enabling you to convert at an even more opportune price this time.
For more guidance on tax swaps and Roth moves, see IRS Publications 550 and 590 (www.irs.gov/publications); be sure to walk through the requirements with your tax adviser to confirm that you qualify. You wouldn't want to miss out on the chance to clean up by year's end, but you wouldn't want to mess it up, either.
Write to Jason Zweig at intelligentinvestor@wsj.com
Dividends Without Debt
Dividends Without Debt
By JACK HOUGH
An 18% dividend yield is usually a warning sign. It might mean investors have little confidence in a company's ability to preserve its share price and keep making payments. Often, debt adds to the anxiety. Newspaper publisher Gannett pays 18%, but has sinking sales and profits and carries long-term debt of nearly double its stock-market value. Capstead Mortgage pays 21%. Its business of borrowing cheap-to-hold government-sponsored mortgage debt isn't as risky as it sounds, unless financing dries up -- something investors are clearly worried about.
Biovail yields 18% and owes nothing. It, too, has warts. But maybe the stock has gotten cheap enough to make up for them.
Ontario-based Biovail, Canada's largest traded drug company, has focused since the mid-1990s on making alternative versions of existing drugs. But the thinning development pipelines of big drug makers have given Biovail less to work with.
Its biggest hit, Wellbutrin XL, has faced generic competition since late 2006. Ultram ER, a once-daily pain pill released in 2006, hasn't caught on as quickly as hoped. Demand for Zovirax, a herpes cream, and Cardizem LA, a pill for high blood pressure, is cooling, too. Companywide sales are on pace to shrink to $748 million this year and $695 million next year. Shares, which multiplied in price from 50 cents in 1994 to more than $50 in 2001, have since fallen below $9.
Biovail is plowing money into purchasing and developing a new roster of drugs, an effort analysts say won't reverse sales declines for at least two years. The company is still plenty profitable. A drop of 50 cents per share in profit this year and another foreseen for next year of 24 cents will leave 2009 profit of $1.13 a share. That puts the stock at less than eight times earnings. But investors have their pick of low-P/E stocks about now.
If they can rely on pocketing 18% for a few years, though, shares are certainly cheap enough. The company can afford the payments. Even with dwindling drug sales, it will clear enough free cash. What's unknown is whether management will fund its new drug efforts with a dividend trim or with already-budgeted research dollars. Shareholders surely hope for the latter. Few investments reward investors as richly at the moment as cash in the pocket.
For more debt-free companies with big dividends, if not quite double-digit ones, have a look at the list below.
By JACK HOUGH
An 18% dividend yield is usually a warning sign. It might mean investors have little confidence in a company's ability to preserve its share price and keep making payments. Often, debt adds to the anxiety. Newspaper publisher Gannett pays 18%, but has sinking sales and profits and carries long-term debt of nearly double its stock-market value. Capstead Mortgage pays 21%. Its business of borrowing cheap-to-hold government-sponsored mortgage debt isn't as risky as it sounds, unless financing dries up -- something investors are clearly worried about.
Biovail yields 18% and owes nothing. It, too, has warts. But maybe the stock has gotten cheap enough to make up for them.
Ontario-based Biovail, Canada's largest traded drug company, has focused since the mid-1990s on making alternative versions of existing drugs. But the thinning development pipelines of big drug makers have given Biovail less to work with.
Its biggest hit, Wellbutrin XL, has faced generic competition since late 2006. Ultram ER, a once-daily pain pill released in 2006, hasn't caught on as quickly as hoped. Demand for Zovirax, a herpes cream, and Cardizem LA, a pill for high blood pressure, is cooling, too. Companywide sales are on pace to shrink to $748 million this year and $695 million next year. Shares, which multiplied in price from 50 cents in 1994 to more than $50 in 2001, have since fallen below $9.
Biovail is plowing money into purchasing and developing a new roster of drugs, an effort analysts say won't reverse sales declines for at least two years. The company is still plenty profitable. A drop of 50 cents per share in profit this year and another foreseen for next year of 24 cents will leave 2009 profit of $1.13 a share. That puts the stock at less than eight times earnings. But investors have their pick of low-P/E stocks about now.
If they can rely on pocketing 18% for a few years, though, shares are certainly cheap enough. The company can afford the payments. Even with dwindling drug sales, it will clear enough free cash. What's unknown is whether management will fund its new drug efforts with a dividend trim or with already-budgeted research dollars. Shareholders surely hope for the latter. Few investments reward investors as richly at the moment as cash in the pocket.
For more debt-free companies with big dividends, if not quite double-digit ones, have a look at the list below.
Click on the image to get the full version.
Coping With the Inevitable: The Losers in Your Portfolio
Coping With the Inevitable: The Losers in Your Portfolio
By JAMES B. STEWART
However unnerving, there's this to be said about stock-market crashes and bear markets: They generate losses, which in turn lower your taxes. One of the few positive things I can say about the tech-stock collapse of 2000-02 is that I didn't pay capital-gains taxes for years.
If you've been avoiding looking at your account statements recently -- a state of denial I can well understand -- it's time to take a deep breath and tally your unrealized losses. (Most online accounts have a feature that displays that information, as do many paper reporting statements.) I did this recently, and though the results came as something of a shock, I was actually surprised at how many positions still showed gains or only minor declines. Of course, many of these positions were 10 years old or more.
It seems to help, at least psychologically, that for these purposes, the bigger the losses the better. If you have capital gains this year, as I do (the result of selling some of my energy positions last spring) you can use these losses to offset the gains. Most investors can deduct up to $3,000 in net losses against ordinary income ($1,500 if you're married and filing separately), provisions everyone should be sure to take advantage of. And excess losses can be carried forward to that happy day when once again you need to shield gains.
Obviously, you need to sell something to realize a loss. What should you sell? I simply start with the biggest losers. This year, two of those positions were General Electric and Valero Energy, not the financial stocks I'd begun buying this year and which I expected to show the biggest losses.
I had no trouble dispensing with both. GE has pretty much been a disappointment ever since Jack Welch stepped down. I don't blame his successor, Jeffrey Immelt; after all, Mr. Welch was the architect who added NBC (now NBC/Universal) to GE's portfolio and beefed up GE Capital. Media and financial are two sectors that have been crushed in the recent sell-off. While I believe GE Capital will weather the storm, I'm no longer interested in owning a television network or a Hollywood studio.
Part of my goal while selling is to maintain my overall exposure to the market; I'm not trying to time the market. I also want to avoid a common syndrome, which is to sell the biggest losers, then chase the best performing stocks. So I put the GE proceeds into shares of United Technologies, which is a genuine industrial cyclical compared to the hybrid GE. UTX is down over 35% this year, better than GE has fared, but still a steep decline. Not only are cyclicals out of favor in the midst of depression fears, but I believe they could benefit from proposed global infrastructure spending.
For Valero, I substituted Devon Energy and Chevron, two oil producers I've previously recommended for their exposure to Brazil's big offshore oil discovery. A closer alternative would have been another refiner, like Tesoro. But the refiners have shown a perverse ability to suffer from both low and high oil prices. I suppose there exists a golden mean where they manage to make money, but I've given up waiting for it. The refining business is just too competitive, which is great for consumers, but not shareholders. By buying Devon and Chevron, I'm gradually increasing my exposure to the energy sector now that oil prices are below $50 a barrel.
I find making these kinds of changes to be healthy, forcing you to concentrate on the investment rationale for your holdings. By moving from one stock to another in the same sector, you also avoid the problem of violating the "wash sale" rule. A wash sale typically occurs when you sell stock at a loss and buy the same thing within 30 days of the sale. Violate this rule, and you can't deduct the loss.
Of course you have to make these moves before Dec. 31 to reduce your 2008 taxes. I'm planning to continue realizing losses gradually over the remaining month. Supposedly there's a burst of this kind of selling right before the end of the year, depressing stocks, followed by the "January effect" rise once the selling is over. That seems plausible, but I've never seen any data to support it. Last year there certainly was no January effect. In any event, by maintaining your overall market position, you don't need to worry.
James B. Stewart, a columnist for SmartMoney magazine and SmartMoney.com, writes weekly about his personal investing strategy. Unlike Dow Jones reporters, he may have positions in the stocks he writes about. For his past columns, see: www.smartmoney.com/commonsense.
http://online.wsj.com/article/SB122826218146374041.html
By JAMES B. STEWART
However unnerving, there's this to be said about stock-market crashes and bear markets: They generate losses, which in turn lower your taxes. One of the few positive things I can say about the tech-stock collapse of 2000-02 is that I didn't pay capital-gains taxes for years.
If you've been avoiding looking at your account statements recently -- a state of denial I can well understand -- it's time to take a deep breath and tally your unrealized losses. (Most online accounts have a feature that displays that information, as do many paper reporting statements.) I did this recently, and though the results came as something of a shock, I was actually surprised at how many positions still showed gains or only minor declines. Of course, many of these positions were 10 years old or more.
It seems to help, at least psychologically, that for these purposes, the bigger the losses the better. If you have capital gains this year, as I do (the result of selling some of my energy positions last spring) you can use these losses to offset the gains. Most investors can deduct up to $3,000 in net losses against ordinary income ($1,500 if you're married and filing separately), provisions everyone should be sure to take advantage of. And excess losses can be carried forward to that happy day when once again you need to shield gains.
Obviously, you need to sell something to realize a loss. What should you sell? I simply start with the biggest losers. This year, two of those positions were General Electric and Valero Energy, not the financial stocks I'd begun buying this year and which I expected to show the biggest losses.
I had no trouble dispensing with both. GE has pretty much been a disappointment ever since Jack Welch stepped down. I don't blame his successor, Jeffrey Immelt; after all, Mr. Welch was the architect who added NBC (now NBC/Universal) to GE's portfolio and beefed up GE Capital. Media and financial are two sectors that have been crushed in the recent sell-off. While I believe GE Capital will weather the storm, I'm no longer interested in owning a television network or a Hollywood studio.
Part of my goal while selling is to maintain my overall exposure to the market; I'm not trying to time the market. I also want to avoid a common syndrome, which is to sell the biggest losers, then chase the best performing stocks. So I put the GE proceeds into shares of United Technologies, which is a genuine industrial cyclical compared to the hybrid GE. UTX is down over 35% this year, better than GE has fared, but still a steep decline. Not only are cyclicals out of favor in the midst of depression fears, but I believe they could benefit from proposed global infrastructure spending.
For Valero, I substituted Devon Energy and Chevron, two oil producers I've previously recommended for their exposure to Brazil's big offshore oil discovery. A closer alternative would have been another refiner, like Tesoro. But the refiners have shown a perverse ability to suffer from both low and high oil prices. I suppose there exists a golden mean where they manage to make money, but I've given up waiting for it. The refining business is just too competitive, which is great for consumers, but not shareholders. By buying Devon and Chevron, I'm gradually increasing my exposure to the energy sector now that oil prices are below $50 a barrel.
I find making these kinds of changes to be healthy, forcing you to concentrate on the investment rationale for your holdings. By moving from one stock to another in the same sector, you also avoid the problem of violating the "wash sale" rule. A wash sale typically occurs when you sell stock at a loss and buy the same thing within 30 days of the sale. Violate this rule, and you can't deduct the loss.
Of course you have to make these moves before Dec. 31 to reduce your 2008 taxes. I'm planning to continue realizing losses gradually over the remaining month. Supposedly there's a burst of this kind of selling right before the end of the year, depressing stocks, followed by the "January effect" rise once the selling is over. That seems plausible, but I've never seen any data to support it. Last year there certainly was no January effect. In any event, by maintaining your overall market position, you don't need to worry.
James B. Stewart, a columnist for SmartMoney magazine and SmartMoney.com, writes weekly about his personal investing strategy. Unlike Dow Jones reporters, he may have positions in the stocks he writes about. For his past columns, see: www.smartmoney.com/commonsense.
http://online.wsj.com/article/SB122826218146374041.html
Friday 12 December 2008
Recent tulmultuous events provided great opportunity
How to keep your head when people all around you are losing theirs...
Morningstar FundInvestor:
Your roadmap to the best funds to buy, sell, and watch.
Dear Investor,
It's no secret that this is a frightening market. Watching the devastating effects of the financial meltdown and widespread panic scare me, too. But I also think the tumultuous events have provided savvy investors with a great opportunity.
As unnerving as recent events have been, history has shown us that the economy will bounce back, and that means the market will too. Ten years from now, 20 years from now, people will look back at this time and wish that they had invested more. See how Morningstar FundInvestor can provide you ways to add breadth to your portfolio. Review the current issue for one month at no charge. If you like what you read, continue your subscription and benefit from 11 more months of hard-hitting analysis and research. If not, cancel before the 30 days is up and your credit card will not be charged.
The Morningstar Difference
You may be asking why should you choose FundInvestor instead of another mutual fund newsletter. The answer is depth, experience, and unbiased recommendations. FundInvestor boasts the support of a large research analyst staff that makes scores of fund company visits and thousands of phone calls to managers each year. I have 14 years of experience at Morningstar, and I know how to block out all the noise and focus on what really matters when selecting funds.
To take advantage of low fund prices, you need great fundamental research, a long-term focus, and a game plan. At Morningstar, we sort through performance data, expenses, trading costs, and more to give you unvarnished recommendations on the top 500 funds that should be on your radar. Plus, with our targeted 150 Analyst Picks, we'll tell you what funds make the best long-term investments, and we watch them closely to make sure they continue to merit our recommendations.
I'll guide you to the best managers--those who invest more than one million dollars in the fund they manage--and steer you away from the over hyped managers. I will also provide insights into companies that are a good steward of your funds and name names of those that are not.
So tune out the panicky doomsayers on television and invest in some of the best funds around. Don't throw up your hands and give up on investing. With the downturn in the market, there are more funds available than ever before.
Sincerely,
Russel KinnelEditor,
Morningstar FundInvestor
http://www.morningstar.com/Products/Store_FundInvestor.html
Morningstar FundInvestor:
Your roadmap to the best funds to buy, sell, and watch.
Dear Investor,
It's no secret that this is a frightening market. Watching the devastating effects of the financial meltdown and widespread panic scare me, too. But I also think the tumultuous events have provided savvy investors with a great opportunity.
As unnerving as recent events have been, history has shown us that the economy will bounce back, and that means the market will too. Ten years from now, 20 years from now, people will look back at this time and wish that they had invested more. See how Morningstar FundInvestor can provide you ways to add breadth to your portfolio. Review the current issue for one month at no charge. If you like what you read, continue your subscription and benefit from 11 more months of hard-hitting analysis and research. If not, cancel before the 30 days is up and your credit card will not be charged.
The Morningstar Difference
You may be asking why should you choose FundInvestor instead of another mutual fund newsletter. The answer is depth, experience, and unbiased recommendations. FundInvestor boasts the support of a large research analyst staff that makes scores of fund company visits and thousands of phone calls to managers each year. I have 14 years of experience at Morningstar, and I know how to block out all the noise and focus on what really matters when selecting funds.
To take advantage of low fund prices, you need great fundamental research, a long-term focus, and a game plan. At Morningstar, we sort through performance data, expenses, trading costs, and more to give you unvarnished recommendations on the top 500 funds that should be on your radar. Plus, with our targeted 150 Analyst Picks, we'll tell you what funds make the best long-term investments, and we watch them closely to make sure they continue to merit our recommendations.
I'll guide you to the best managers--those who invest more than one million dollars in the fund they manage--and steer you away from the over hyped managers. I will also provide insights into companies that are a good steward of your funds and name names of those that are not.
So tune out the panicky doomsayers on television and invest in some of the best funds around. Don't throw up your hands and give up on investing. With the downturn in the market, there are more funds available than ever before.
Sincerely,
Russel KinnelEditor,
Morningstar FundInvestor
http://www.morningstar.com/Products/Store_FundInvestor.html
Thursday 11 December 2008
Liquidating Value of Assets
Liquidating Value of Assets
Percentage of Liquidating Value to Book Value
(Normal Range & Rough Average)
Type of Asset
Current assets: cash assets (including securities at market)
Normal Range: 100%
Rough Average: 100%
Current assets: receivables (less usual reserves)*
Normal Range: 75%-90%
Rough Average: 80%
Current assets: inventories (at lower of cost or market)
Normal Range: 50%-75%
Rough Average: 66% (2/3)
Fixed and miscellaneous assets: real estate, buildings, machinery, equipment, nonmarketable investments, intangibles
Normal Range: 1%-50%
Rough Average: 15% (approx.)
*Retail instalment accounts must be valued for liquidation at a lower rate. The range is about 30%-60%; the average, about 50%
Source: Security Analysis (New York: McGraw Hill, 1940), p.579
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Liquidating Value
When looking at the current asset value, we’re getting down to a notion that few investors care to ponder – the liquidating value.
Following the Great Depression the share price of public companies fell so low that many investors bought in just to sell off the companies’ assets and close their operations.
Liquidating a company is not a pleasant prospect, since workers lose their jobs, communities lose their income base, and society in general suffers.
The liquidating value is not only the end of the line; it can be seen as the absolute bottom line. There is no question that the ultimate intrinsic value is revealed when liquidation occurs.
The net current asset value (working capital) per share described by Graham also is a rough index of liquidating value. The liquidating value of a company is never a hard number. It can only be estimated, until a company actually is sold off. This is attributed to a fact we sometimes called Graham and Dodd’s first rule of liquidating value: “The liabilities are real but the value of the assets must be questioned.”
Fortunately, advise Graham and Dodd, it is enough to get a rough idea of the liquidating value for most purposes, accepting the fact that you won’t get, nor will you actually need, an exact figure.
A share price below liquidating value seldom is good news. Temporary conditions – a big stock market drop, a sudden reaction to shocking bad news – may impact a company to that extent. Very quickly, however, the share price should recover. When a stock persistently sells below its liquidating value, it indicates an error in judgment by someone – management, shareholders, or the stock market in general.
Percentage of Liquidating Value to Book Value
(Normal Range & Rough Average)
Type of Asset
Current assets: cash assets (including securities at market)
Normal Range: 100%
Rough Average: 100%
Current assets: receivables (less usual reserves)*
Normal Range: 75%-90%
Rough Average: 80%
Current assets: inventories (at lower of cost or market)
Normal Range: 50%-75%
Rough Average: 66% (2/3)
Fixed and miscellaneous assets: real estate, buildings, machinery, equipment, nonmarketable investments, intangibles
Normal Range: 1%-50%
Rough Average: 15% (approx.)
*Retail instalment accounts must be valued for liquidation at a lower rate. The range is about 30%-60%; the average, about 50%
Source: Security Analysis (New York: McGraw Hill, 1940), p.579
-----
Liquidating Value
When looking at the current asset value, we’re getting down to a notion that few investors care to ponder – the liquidating value.
Following the Great Depression the share price of public companies fell so low that many investors bought in just to sell off the companies’ assets and close their operations.
Liquidating a company is not a pleasant prospect, since workers lose their jobs, communities lose their income base, and society in general suffers.
The liquidating value is not only the end of the line; it can be seen as the absolute bottom line. There is no question that the ultimate intrinsic value is revealed when liquidation occurs.
The net current asset value (working capital) per share described by Graham also is a rough index of liquidating value. The liquidating value of a company is never a hard number. It can only be estimated, until a company actually is sold off. This is attributed to a fact we sometimes called Graham and Dodd’s first rule of liquidating value: “The liabilities are real but the value of the assets must be questioned.”
Fortunately, advise Graham and Dodd, it is enough to get a rough idea of the liquidating value for most purposes, accepting the fact that you won’t get, nor will you actually need, an exact figure.
A share price below liquidating value seldom is good news. Temporary conditions – a big stock market drop, a sudden reaction to shocking bad news – may impact a company to that extent. Very quickly, however, the share price should recover. When a stock persistently sells below its liquidating value, it indicates an error in judgment by someone – management, shareholders, or the stock market in general.
Wednesday 10 December 2008
****My Investment Philosophy, Strategy and various Valuation Methods
Investment Philosophy and Strategy
Investment, speculation and gambling
My strategies for buying and selling (KISS version)
Investment Policies (Based on Benjamin Graham)
Thriving In Every Market
The Estimate of Future Earning Power
-----
Risks, Rewards, Probabilities and Consequences
Consequences must dominate Probabilities
The risk is not in our stocks, but in ourselves
Behavioural Finance
Strategies for Overcoming Psychological Biases
-----
The Power of Compounding
**Understanding the Power of Compounding
http://www.horizon.my/2008/11/the-story-of-anne-scheiber/
Be like Grace: 5 Lessons From an Unlikely Millionaire
Slow consistent accumulation through the power of compounding
The Master: Warren Buffett 1
What is your optimum Return on Investment?
-----
Strategies: For Buying, Holding and Selling & Portfolio Management
Stock Selling Guide - Gain/Loss Worksheet (Part 1 of 5)
Stock Sale Considerations (Part 2 of 5)
Evaluating Changing Fundamentals (Part 3 of 5)
To Sell or to Hold Checklist (Part 4 of 5)
Selling and Holding mistakes Checklist (Part 5 of 5)
Portfolio Management - Defensive & Offensive strategies
Detail version of To Sell or to Hold & Portfolio Management
My strategies for buying and selling (KISS version)
-----
Strategies: Good Quality Companies with Durable Competitive Advantage
**Exploring Durable Competitive Advantage
Company with Durable Competitive Advantage 1
Selling a unique product 2
Selling a unique service 3
Low-cost buyer and seller of a product or service 4...
Warren's durable competitive advantage companies 5...
Buffett versus Graham 6
Durability is the Ticket to Riches 7
Financial Statement: Where the Gold is Hidden 8
Durable Competititve Advantage - Conclusion 9
-----
Strategies: Asset Allocation & Market PE
Preparing Your Portfolio Is the Most Important Action You Can Take
**A Seven-Step Process for investing in New Assets
**Why Stocks Are Dirt Cheap
20.11.2008 - KLSE MARKET PE
-----
Valuation: Based on Equity per Share
Stock Valuation
Variable values of a dollar of earnings
Assumptions used to calculate value
Stock valuation
Stock valuation 2
Stock Valuation 3
Stock Valuation 4
Stock valuation 5
Stock Valuation 6
Stock valuation 7
Stock Val's@ valuation formula:{[(APC/RR) x Reinvestment + Dividends]/RR} x Equity per share = VALUE
-----
Valuation: Based on Buffett's Equity Bond Concept
Warren Buffett’s Concept of Equity Bond in Action
Warren Buffett's concept of Equity Bond
-----
Valuation: Based on Ben Graham's checklist
Ben Graham Checklist for Finding Undervalued Stocks
-----
Valuation: Discount Cash Flow models (using various types of cash flows)
http://www.capital-flow-analysis.com/investment-theory/stock-valuation.html
----
*****Long term investing based on Buy and Hold works for Selected Stocks
Why Stocks That Raise Dividends Trounce the Market
----
Also read:
Market Strategies Review Notes I (January 2009)
Investment, speculation and gambling
My strategies for buying and selling (KISS version)
Investment Policies (Based on Benjamin Graham)
Thriving In Every Market
The Estimate of Future Earning Power
-----
Risks, Rewards, Probabilities and Consequences
Consequences must dominate Probabilities
The risk is not in our stocks, but in ourselves
Behavioural Finance
Strategies for Overcoming Psychological Biases
-----
The Power of Compounding
**Understanding the Power of Compounding
http://www.horizon.my/2008/11/the-story-of-anne-scheiber/
Be like Grace: 5 Lessons From an Unlikely Millionaire
Slow consistent accumulation through the power of compounding
The Master: Warren Buffett 1
What is your optimum Return on Investment?
-----
Strategies: For Buying, Holding and Selling & Portfolio Management
Stock Selling Guide - Gain/Loss Worksheet (Part 1 of 5)
Stock Sale Considerations (Part 2 of 5)
Evaluating Changing Fundamentals (Part 3 of 5)
To Sell or to Hold Checklist (Part 4 of 5)
Selling and Holding mistakes Checklist (Part 5 of 5)
Portfolio Management - Defensive & Offensive strategies
Detail version of To Sell or to Hold & Portfolio Management
My strategies for buying and selling (KISS version)
-----
Strategies: Good Quality Companies with Durable Competitive Advantage
**Exploring Durable Competitive Advantage
Company with Durable Competitive Advantage 1
Selling a unique product 2
Selling a unique service 3
Low-cost buyer and seller of a product or service 4...
Warren's durable competitive advantage companies 5...
Buffett versus Graham 6
Durability is the Ticket to Riches 7
Financial Statement: Where the Gold is Hidden 8
Durable Competititve Advantage - Conclusion 9
-----
Strategies: Asset Allocation & Market PE
Preparing Your Portfolio Is the Most Important Action You Can Take
**A Seven-Step Process for investing in New Assets
**Why Stocks Are Dirt Cheap
20.11.2008 - KLSE MARKET PE
-----
Valuation: Based on Equity per Share
Stock Valuation
Variable values of a dollar of earnings
Assumptions used to calculate value
Stock valuation
Stock valuation 2
Stock Valuation 3
Stock Valuation 4
Stock valuation 5
Stock Valuation 6
Stock valuation 7
Stock Val's@ valuation formula:{[(APC/RR) x Reinvestment + Dividends]/RR} x Equity per share = VALUE
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Valuation: Based on Buffett's Equity Bond Concept
Warren Buffett’s Concept of Equity Bond in Action
Warren Buffett's concept of Equity Bond
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Valuation: Based on Ben Graham's checklist
Ben Graham Checklist for Finding Undervalued Stocks
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Valuation: Discount Cash Flow models (using various types of cash flows)
http://www.capital-flow-analysis.com/investment-theory/stock-valuation.html
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*****Long term investing based on Buy and Hold works for Selected Stocks
Why Stocks That Raise Dividends Trounce the Market
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Also read:
Market Strategies Review Notes I (January 2009)
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