The title for this newsletter comes from my dear friend and first client, Pastor James Ritch. Humpty Dumpty refers to his IRA account. If you know him, feel free to talk to him about it. Way to go Pastor James Ritch!!!!!
During June 2007, when the Dow was about 13,500, I had the pleasure of having Pastor James Ritch become my first client. During September 2009, when the Dow was about 9,900, his IRA account balance recovered and returned to about the same initial amount. As he explained, his IRA account fell, cracked wide open, was put back together again in better shape, and made it back on top of the wall.
When the Dow reaches about 13,500 in the future, about 35% higher from here, his account will be doing great and I will be smiling. This economic downturn provided a wonderful buying opportunity that turbo-charged his account. Pastor Ritch is a car guy. The end result is a better Humpty Dumpty.
How did this happen? Here are some of the things that were done:
Communication: This was a very turbulent time and we communicated on a regular basis.
Defensive: As the environment change, his account was changed and was repositioned to be more defensive. In hindsight, I should have even been more defensive.
Data: Data was used to determine the bottom of the fall and when to start buying. The use of statistics is very powerful in determining the probability of an event.
Courage: He had great courage and viewed the fall as a buying opportunity. When other investors were concerned and were afraid, he viewed it as a great buying opporunity.
Keep the Portfolio in Balance: As the value of the equities dropped, the percentage of equities reduced below the target level. To get it back in balance, a bond mutual fund that did not perform as well as it should was sold to purchase more of an equity mutual fund.
Aggressive: As the recovery progressed the account was tweaked again to increase the amount in a more aggressive equity mutual fund. In addition, he bought stock for the first time in his life, buying a technology company and a financial company that have done very well.
Performance: This period was great to determine the true performance of a mutual fund. Only highly rated mutual funds with a minimal fee rate were used. Keep the best and leave the average to the rest.
For those who use an investment advisor, I hope your Humpty Dumpty is doing as well. If not, it would be my pleasure to help you.
Friday, September 25, 2009
Sunday, September 20, 2009
Bank CD
This newsletter will be relatively short. It is my biased view of a Certificate of Deposit at any bank because I do not view a CD as a real investment. To me it is like being held up. At the end are additional tidbits of information.
Once, sometime in the 1980's, I owned a CD from Omaha State bank, it was a 3 year CD that paid me 3 or 4% per year. At the end of this experience, I vowed never to buy one again. So far I have been true to my word. I did like that they did fulfill the contract and paid me interest and my original principle. I did like at the time the idea of FDIC security. That was about all I liked about the experience.
What I did not like about the experience were:
1) My money was locked up for 3 years, kind of like an inverse bank robbery.
2) My rate of return was as good as a money market account so I could have put my money in a money market account, gotten the same return, and had access to it at the same time.
3) What I got paid in interest was only a fraction of what the bank got.
4) A money market fund has the same safety as a CD, since the SEC made whole the only money market fund to ever lose money which did occur last year, the FDIC insurance cost is really a tax eating into my return.
Let's talk about the game the bank is playing. They take the money, loan it out at a much higher rate, and take the difference as gross profit. Wouldn't you be glad to make 6% on the money and only pay out 3% to get it?
A local bank is paying 2% interest on a 24 month CD. The historical average rate of return for a corporate bond or mortgage backed bond is between 5 and 6%. So the bank has a spread of 3 - 4% that they are making on your money. You are a lot better off getting the 5 - 6% interest. An extra 4% interest doubles you money in 18 years. I do not mind someone making money except when they make more money off of me than I make myself, this is just wrong!!!
Once, sometime in the 1980's, I owned a CD from Omaha State bank, it was a 3 year CD that paid me 3 or 4% per year. At the end of this experience, I vowed never to buy one again. So far I have been true to my word. I did like that they did fulfill the contract and paid me interest and my original principle. I did like at the time the idea of FDIC security. That was about all I liked about the experience.
What I did not like about the experience were:
1) My money was locked up for 3 years, kind of like an inverse bank robbery.
2) My rate of return was as good as a money market account so I could have put my money in a money market account, gotten the same return, and had access to it at the same time.
3) What I got paid in interest was only a fraction of what the bank got.
4) A money market fund has the same safety as a CD, since the SEC made whole the only money market fund to ever lose money which did occur last year, the FDIC insurance cost is really a tax eating into my return.
Let's talk about the game the bank is playing. They take the money, loan it out at a much higher rate, and take the difference as gross profit. Wouldn't you be glad to make 6% on the money and only pay out 3% to get it?
A local bank is paying 2% interest on a 24 month CD. The historical average rate of return for a corporate bond or mortgage backed bond is between 5 and 6%. So the bank has a spread of 3 - 4% that they are making on your money. You are a lot better off getting the 5 - 6% interest. An extra 4% interest doubles you money in 18 years. I do not mind someone making money except when they make more money off of me than I make myself, this is just wrong!!!
Major Market Moves
Last week’s newsletter concerned avoiding the trade to catch short term gains. This newsletter is about catching the major market moves and avoiding the noise. Also at the end are 8 additional tidbits of knowledge.
This last week, the Wall Street Journal had an article about how the recent rise in the stock market may be coming to an end. The next day, the Wall Street Journal had the Senior Analysts of Wall Street firms give their prediction for the S&P 500 at year’s end with the consensus being about a 3-4% increase to a level of 1040 – 1050. This is all information good for filling a newspaper and little else. By the way, this level of 1043 was reached this week. Time does fly as you get older.
A book called A Random Walk Down Wall Street had a chapter on the lack of value of following advice from the Senior Analysts paid by Wall Street firms. You may remember a study was done during the 1980’s by the Wall Street Journal to evaluate the stock picking skill for Senior Analysts. In a head to head stock picking competition, stock performance of people selecting stocks by throwing darts at the Wall Street Journal taped to the wall was compared to the stock performance of that picked by Senior Analysts. This study showed statistically that both groups had the same performance. The bottom line is that these Analysts get paid a lot of money, did I mention your money, to make the firm look smart and to justify making moves for clients to generate revenue.
What I have found is that an investor is the most successful when a major market move is identified and followed. When the inflection point is reached then it is time to make an investment change. When you hear an expert on TV stating how the relation of the Euro to the Yen is impacting the stock market you will probably be better off changing the channel.
What are some Major Market Moves? The first is the economy is improving, GDP is growing and this provides growth for stocks in the stock market. Secondly, higher government borrowing is going to increase long term interest rates due to supply and demand.
This last week, the Wall Street Journal had an article about how the recent rise in the stock market may be coming to an end. The next day, the Wall Street Journal had the Senior Analysts of Wall Street firms give their prediction for the S&P 500 at year’s end with the consensus being about a 3-4% increase to a level of 1040 – 1050. This is all information good for filling a newspaper and little else. By the way, this level of 1043 was reached this week. Time does fly as you get older.
A book called A Random Walk Down Wall Street had a chapter on the lack of value of following advice from the Senior Analysts paid by Wall Street firms. You may remember a study was done during the 1980’s by the Wall Street Journal to evaluate the stock picking skill for Senior Analysts. In a head to head stock picking competition, stock performance of people selecting stocks by throwing darts at the Wall Street Journal taped to the wall was compared to the stock performance of that picked by Senior Analysts. This study showed statistically that both groups had the same performance. The bottom line is that these Analysts get paid a lot of money, did I mention your money, to make the firm look smart and to justify making moves for clients to generate revenue.
What I have found is that an investor is the most successful when a major market move is identified and followed. When the inflection point is reached then it is time to make an investment change. When you hear an expert on TV stating how the relation of the Euro to the Yen is impacting the stock market you will probably be better off changing the channel.
What are some Major Market Moves? The first is the economy is improving, GDP is growing and this provides growth for stocks in the stock market. Secondly, higher government borrowing is going to increase long term interest rates due to supply and demand.
Monday, September 7, 2009
Brokerage Companies
Happy Labor Day!!! I hope you have enjoyed the day. This newsletter will be shorter than normal and covers my unfavorable opinion of brokerage companies. I know of some great people who are brokers, it is the brokerage game that has me concerned.
In finance, a broker is someone who simply fills buy or sell orders on behalf of clients and only makes money when a trade is executed either a buy or a sell. The broker and brokerage company makes money on the trade regardless of whether you do. I get concerned when a financial entity exists to create hype to increase the number of trades and invent new ways to trade and do it in a manner that potential buyers do not fully understand the trade or the consequence of the trade.
You might remember that during the stock market crash of 1987, the New York Stock Exchange reached a record volume exceeding 500 million shares in a day. Now, each day the typical volume on the NYSE is about 1.5 billion shares with numbers in the range of 1 to 2 billion shares. Earlier this year, the volume traded on Bank of America stock and Citigroup stock alone in a single day approached 1.5 billion shares.
Each year Wall Street gives out bonuses to their top people, with a $1 million dollar bonus being commonplace. How do these companies get this money? It is from getting people to trade often regardless of whether the stock market is going up or down.
Let’s do a quick math exercise. If 1/10 of a cent, $0.001, is made on each share of stock that gets paid out as a bonus and 500 billion shares are traded in a year, the amount of bonus paid out is $500 million. Obviously this number is low, since we hear about a person who is demanding to get paid his $100 million bonus from last year from a company that got taxpayer money to stay in business.
TV shows like Mad Money and Fast Money are funded by a Brokerage company that tells the listener to buy or sell with a very short term perspective like what you should do tomorrow. Some names of these Brokerage companies include the name trade such as: Scottrade, Ameritrade, Gorilla Trade.
It is okay to use a broker or have an account at a Brokerage company, just don’t get sucked into the hype. Follow the longer term trends of the market rather than the day to day mood swings.
In finance, a broker is someone who simply fills buy or sell orders on behalf of clients and only makes money when a trade is executed either a buy or a sell. The broker and brokerage company makes money on the trade regardless of whether you do. I get concerned when a financial entity exists to create hype to increase the number of trades and invent new ways to trade and do it in a manner that potential buyers do not fully understand the trade or the consequence of the trade.
You might remember that during the stock market crash of 1987, the New York Stock Exchange reached a record volume exceeding 500 million shares in a day. Now, each day the typical volume on the NYSE is about 1.5 billion shares with numbers in the range of 1 to 2 billion shares. Earlier this year, the volume traded on Bank of America stock and Citigroup stock alone in a single day approached 1.5 billion shares.
Each year Wall Street gives out bonuses to their top people, with a $1 million dollar bonus being commonplace. How do these companies get this money? It is from getting people to trade often regardless of whether the stock market is going up or down.
Let’s do a quick math exercise. If 1/10 of a cent, $0.001, is made on each share of stock that gets paid out as a bonus and 500 billion shares are traded in a year, the amount of bonus paid out is $500 million. Obviously this number is low, since we hear about a person who is demanding to get paid his $100 million bonus from last year from a company that got taxpayer money to stay in business.
TV shows like Mad Money and Fast Money are funded by a Brokerage company that tells the listener to buy or sell with a very short term perspective like what you should do tomorrow. Some names of these Brokerage companies include the name trade such as: Scottrade, Ameritrade, Gorilla Trade.
It is okay to use a broker or have an account at a Brokerage company, just don’t get sucked into the hype. Follow the longer term trends of the market rather than the day to day mood swings.
Subscribe to:
Posts (Atom)