The Monday January 9, 2012 Wall Street Journal had a article titled "Stocks or Bonds? The Pros Say..." This article gives great info on the historical performance and future of the S&P 500 Stock Index and Long Term US Treasury Bonds. I will add my comments on why an investor would own US Stocks or long term US Treasury Bonds. At the end is a short story titled The Tennessee Preacher that seems appropriate for this year.
Vanguard
Sluggish retail sales data were announced this week following a report that consumer borrowing increased in November by the highest amount in a decade. This suggests that while spending isn't particularly strong, consumers are nonetheless continuing to spend and provide moderate support for the overall economy. For the week ended January 13, the S&P 500 Index rose 0.9% to 1,289.09 (for a year-to-date total return—including price change plus dividends—of about 2.6%). The yield on the 10-year U.S. Treasury note fell 9 basis points to 1.89% (for no change year to date).
Future of US Stocks versus US Treasury Bonds
Here is the information from the WSJ article:
1) Over the past 30 years the S&P 500 index had an average annual return of 11.03% and long term Treasuries had an average annual return of 10.98%.
2) From 1926 through 2011 the S&P 500 index had an average annual return of 9.8% and long term Treasuries had an average annual return of 5.7%.
3) From 1926 through 2011 the S&P 500 index was 6-7% higher than the inflation rate and long term Treasuries was 2-3% higher than the inflation rate.
4) From 1956 through 1981 the S&P 500 index had an average annual return of about 10% and long term Treasuries had an average annual return of about 2.5%.
If we compare these time periods we see that the S&P 500 index was more consistent than long term Treasury Bonds. During the last 30 years, long term Treasury Bonds returned about twice the return since 1926 and about 4 times the return during 1956 to 1981.
So why did this happen? About 30 years ago, during a period of stagflation, the long term Treasury interest rate was about 18%. Leading up to 30 years ago, long term Treasury rates rose significantly which hurt performance. During the last 30 year period was an unprecedented drop in interest rates. It is interesting that the last time long term Treasury Bond rates were this low was about 60 years ago.
So what does this mean for the future of the S&P 500 index and long term US Treasury Bond rates? The data suggests that the S&P 500 index will continue to increase. Since long term US Treasury Bond rates are at a 60 year low it means that these rates will go up which will hurt performance.
So why would an investor own a mutual fund of US Stocks? The answer is higher growth with some volatility. So why own a mutual fund that invests in long term US Treasury bonds. The answer is that I would not instead I would ownn other types of bonds. A blend of US Stocks and bonds does give a blend of growth and more consistency.
The Tennessee Preacher
An old Tennessee country preacher had a teenage son, and it was time the boy should give some thought to choosing a profession. Like many young men his age, the boy didn't really know what he wanted to do, and he didn't seem too concerned about it. One day, while the boy was at school, his father tried an experiment. He went into the boy's room and placed four objects on his son’s desk.
1. A Bible.
2. A silver dollar.
3. A bottle of Jack Daniels whisky.
4. A Playboy magazine.
“I'll hide behind the door,” the old preacher said to him-self. “When he comes home from school, I'll see which object he picks up. If it's the Bible, he's going to be a preacher like me, and what a blessing that would be! If he picks up the silver dollar, he's going to be a businessman, and that would be okay, too. However, if he picks up the bottle, he's going to be a no-good drunken bum, and Lord, what a shame that would be. And worst of all if he picks up that magazine he's going to be a skirt-chasing womanizer.”
The old preacher waited anxiously, and soon heard his son's footsteps as he entered the house and headed for his room. The boy tossed his books on the bed, and as he turned to leave the room, he spotted the objects on his desk. With curiosity in his eyes, he walked over to inspect them. Finally, he picked up the Bible and placed it under his arm. He picked up the silver dollar and dropped it into his pocket. He uncorked the whiskey bottle and took a drink, while he admired the centerfold in Playboy.
“Lord have mercy,” the old preacher whispered disgusted-ly. “He's gonna run for Congress.”
Showing posts with label Stocks. Show all posts
Showing posts with label Stocks. Show all posts
Sunday, January 15, 2012
Sunday, September 11, 2011
Stocks = Value
I hope your day of remembrance has gone well and you have had a chance to enjoy the good things of life. This will be relatively short and will have 3 sections: Vanguard, Stocks = Value, and a true story called The Gingham Dress for your enjoyment. During the past 10 years the investment that has been impacted the most has been Stocks which makes them the investment that currently has the best value which is why I want every client to have a stock mutual fund.
Vanguard
Despite a few good signs, the market's mood turned grim as somewhat favorable reports on spending, trade, and service-sector growth were offset by higher new jobless claims and continued caution from Federal Reserve officials throughout the country. In remarks similar to those he made a few weeks ago, Fed Chairman Ben Bernanke said the central bank has a few more tools in the box to bolster the weakening economy. However, he didn't say whether he'd use them before the Federal Open Market Committee meets on September 20 to consider other measures to promote economic growth. For the week ended September 9, the S&P 500 Index fell 1.7% to 1154.23 (for a year-to-date total return—including price change plus dividends—of about -6.9%). The yield on the 10-year U.S. Treasury note dropped 9 basis points to 1.93% (for a year-to-date decline of 137 basis points).
Stocks = Value
As we all know, the long-term driver for stock price is corporate profits as profits go so does stock price. So in the 10 years what has happened to corporate profits and to stock price?
The Federal Reserve Bank of New York publishes information on publicly traded corporate profit and the chart is titled Corporate Profits with IVA and CCADJ. On September 2001, publicly held corporations had about $800 Billion in profits. The latest number on the chart is about $1,850 Billion in profits or about 2.3 times more.
The Saturday 9/10/2011 Wall Street Journal shows the value for the S&P 500 Stock Index for the last 10 years. The current S&P 500 stock index value is about $1,150. With corporate profits having grown 2.3 times you would think that the value of the S&P 500 index on 9/10/2001 would be much lower. Actually, 10 years ago the value of the S&P 500 index was a little less then $1,100, about the same. So while corporate profits have been growing at an average annual rate of about 9% the value of the S&P 500 index has barely moved.
So why am I still recommending that people buy a stock based mutual fund(s)? Because this is currently the investment that has the best value for a long-term investor.
The Gingham Dress
A lady in a faded gingham dress and her husband, dressed in a homespun threadbare suit, stepped off the train in Boston, Massachusetts and proceeded to the office of the President of Harvard University. The secretary could tell in a moment that such backwoods, country hicks had no business at Harvard.
“We'd like to see the president,” the man said softly. "He'll be busy all day," the secretary snapped. "We'll wait," the lady replied. For hours the secretary ignored them, hoping that the couple would finally become discouraged and go away. They didn't, and the secretary grew frustrated and finally decided to disturb the presi-dent, even though it was a chore she always dreaded.
"Maybe if you see them for a few minutes, they'll leave," she said. He sighed and nodded. Someone of his impor-tance obviously didn't have the time to spend with them, and he detested gingham dresses and homespun suits clut-tering up his outer office. The president, stern faced and with dignity, strutted toward the couple.
The lady told him, "We had a son who attended Harvard for one year. He loved Harvard and he was happy here. About a year ago, he was accidentally killed. My husband and I would like to erect a memorial to him on campus."
The president wasn't touched. He was shocked. "Ma-dam," he said, gruffly, "We can't put up a statue for every person who attended Harvard and died. If we did, this place would look like a cemetery." “Oh, no,” the lady explained quickly. "We don't want to erect a statue. We thought we would like to give a building to Harvard."
The president rolled his eyes. He glanced at the gingham dress and homespun suit, and then exclaimed, “A build-ing. Do you have any earthly idea how much a building costs? We have over seven and a half million dollars in the physical buildings here at Harvard." For a moment, the lady was silent. The president was pleased. Maybe he could get rid of them now.
The lady turned to her husband and said quietly, "Is that all it costs to start a university? Why don't we just start our own?" Her husband nodded. The president's face wilted in confusion and bewilderment. Mr. and Mrs. Leland Stanford got up and walked away, traveled to Palo Alto, California where they established the university that bears their son’s name, Stanford University, a memorial to a son that Harvard no longer cared about.
You can easily judge the character of others by how they treat those who they think can do nothing for them. A true story by Malcolm Forbes.
Vanguard
Despite a few good signs, the market's mood turned grim as somewhat favorable reports on spending, trade, and service-sector growth were offset by higher new jobless claims and continued caution from Federal Reserve officials throughout the country. In remarks similar to those he made a few weeks ago, Fed Chairman Ben Bernanke said the central bank has a few more tools in the box to bolster the weakening economy. However, he didn't say whether he'd use them before the Federal Open Market Committee meets on September 20 to consider other measures to promote economic growth. For the week ended September 9, the S&P 500 Index fell 1.7% to 1154.23 (for a year-to-date total return—including price change plus dividends—of about -6.9%). The yield on the 10-year U.S. Treasury note dropped 9 basis points to 1.93% (for a year-to-date decline of 137 basis points).
Stocks = Value
As we all know, the long-term driver for stock price is corporate profits as profits go so does stock price. So in the 10 years what has happened to corporate profits and to stock price?
The Federal Reserve Bank of New York publishes information on publicly traded corporate profit and the chart is titled Corporate Profits with IVA and CCADJ. On September 2001, publicly held corporations had about $800 Billion in profits. The latest number on the chart is about $1,850 Billion in profits or about 2.3 times more.
The Saturday 9/10/2011 Wall Street Journal shows the value for the S&P 500 Stock Index for the last 10 years. The current S&P 500 stock index value is about $1,150. With corporate profits having grown 2.3 times you would think that the value of the S&P 500 index on 9/10/2001 would be much lower. Actually, 10 years ago the value of the S&P 500 index was a little less then $1,100, about the same. So while corporate profits have been growing at an average annual rate of about 9% the value of the S&P 500 index has barely moved.
So why am I still recommending that people buy a stock based mutual fund(s)? Because this is currently the investment that has the best value for a long-term investor.
The Gingham Dress
A lady in a faded gingham dress and her husband, dressed in a homespun threadbare suit, stepped off the train in Boston, Massachusetts and proceeded to the office of the President of Harvard University. The secretary could tell in a moment that such backwoods, country hicks had no business at Harvard.
“We'd like to see the president,” the man said softly. "He'll be busy all day," the secretary snapped. "We'll wait," the lady replied. For hours the secretary ignored them, hoping that the couple would finally become discouraged and go away. They didn't, and the secretary grew frustrated and finally decided to disturb the presi-dent, even though it was a chore she always dreaded.
"Maybe if you see them for a few minutes, they'll leave," she said. He sighed and nodded. Someone of his impor-tance obviously didn't have the time to spend with them, and he detested gingham dresses and homespun suits clut-tering up his outer office. The president, stern faced and with dignity, strutted toward the couple.
The lady told him, "We had a son who attended Harvard for one year. He loved Harvard and he was happy here. About a year ago, he was accidentally killed. My husband and I would like to erect a memorial to him on campus."
The president wasn't touched. He was shocked. "Ma-dam," he said, gruffly, "We can't put up a statue for every person who attended Harvard and died. If we did, this place would look like a cemetery." “Oh, no,” the lady explained quickly. "We don't want to erect a statue. We thought we would like to give a building to Harvard."
The president rolled his eyes. He glanced at the gingham dress and homespun suit, and then exclaimed, “A build-ing. Do you have any earthly idea how much a building costs? We have over seven and a half million dollars in the physical buildings here at Harvard." For a moment, the lady was silent. The president was pleased. Maybe he could get rid of them now.
The lady turned to her husband and said quietly, "Is that all it costs to start a university? Why don't we just start our own?" Her husband nodded. The president's face wilted in confusion and bewilderment. Mr. and Mrs. Leland Stanford got up and walked away, traveled to Palo Alto, California where they established the university that bears their son’s name, Stanford University, a memorial to a son that Harvard no longer cared about.
You can easily judge the character of others by how they treat those who they think can do nothing for them. A true story by Malcolm Forbes.
Sunday, August 28, 2011
Investing Tug of War
I hope you are doing well and are enjoying life as August comes to a close. For an investor, a good way to describe this past week is to think of the game Tug of War. I will illustrate this in the middle section. The first section is from Vanguard. The last section is more trivia on the subject of the Tomb of the Unknown Soldier.
Vanguard Weekly Recap
The march to extreme caution quickened its pace this week led by more disappointing news for the fragile economy. Key reports on housing, new orders, and national output indicate that the economy, still buffeted by slow growth and persistent joblessness, remains far from reaching a sustained recovery. Amid this discouraging environment, Federal Reserve Chairman Ben Bernanke—in widely anticipated comments on Friday from Jackson Hole, Wyoming—said the central bank stands ready to help dig the economy out of the doldrums but didn't indicate what tools he would use to do so. For the week ended August 26, the S&P 500 Index rose 4.7% to 1,176.80 (for a year-to-date total return—including price change plus dividends—of about -5.2%). The yield on the 10-year U.S. Treasury note increased 12 basis points to 2.19% (for a year-to-date decline of 111 basis points).
Tug of War
I think the best way to describe investing for this year is to use the game of tug of war. As you recall, in this game each side is pulling against each other to move a rope a distance so that a team can win. Normally, during the game the number of players on a team are fixed.
For investing the teams for this tug of war are gold and US Treasury Bonds on 1 side and Stocks on the other side. As gold and US Treasury Bonds go up, stocks go down and vice versa. What makes this game unique is that investors have no loyalty and are either switching sides on a continual basis or putting their money in cash and leaving the game all together.
Who will win this tug of war during 2011? My money is on Stocks since Corporate profits are at an all time record high, about 10% higher than the previous peak in 2006 while the price of gold and US Treasury Bonds are inflated, making absolutely no sense.
Just watch for yourself this week the price of gold, the interest rates on the 10 year US Treasury Bond, and the S&P 500. Since this tug of war exists, this is why a balanced portfolio has both stocks and bonds.
Tomb of the Unknown Soldier Trivia
• Originally called “The Tomb of the Unknown Soldier” it is now called “The Tomb of the Unknowns.” (This change has not been ratified by Congress.) This is the result of WWII, Korean War and the Viet Nam War.
• The guards are called “sentinels” not guards. The sen-tinels wear no insignia of rank on their uniforms so as not to outrank the “unknowns” buried there.
• The sentinels stop on the 21st step, do a ninety-degree turn and face the Tomb for 21 seconds, turn ninety de-grees again hesitate 21 seconds before beginning their return walk. This walk is done on a black mat.
• Why are the sentinels gloves wet? Their gloves are moistened to prevent losing their grip on the M14 rifles, which are unloaded, but kept ready for use at all times and always have a bayonet fixed.
• How many women have served as sentinels? Three.
• Do the sentinels carry their rifle on the same shoulder all the time? No. They always carry their rifle on the shoulder away from the tomb. After they walk 21 steps across the mat, they execute a ninety-degree turn and move the rifle to their outside shoulder.
• How often are the sentinels changed? Sentinels are changed every thirty minutes during the summer – (April 1 – September 30) - and every hour during the winter (October 1 – March 31.) During the hours the cemetery is closed, the sentinel is changed every two hours. The Tomb is guarded twenty-four hours a day, 365 days a year. There has been a sentinel on duty every minute of every day since July 2, 1937. Currently the sentinels work on a three Relief (team) rotation. 24 hours on, 24 hours off, 24 hours on, 24 hours off, 24 hours on and 96 hours off.
• What are the physical characteristics of all sentinels? For a person to apply for sentinel duty they must be be-tween 5’ 10” and 6’ 4” tall and their waist size cannot exceed 30 inches. They are assigned to Relief Teams by height. This is done so that each team will look as identical as possible.
Saturday, May 14, 2011
Stocks, Long Term Bonds, and Commodities
This week was a little wild with fluctuations in commodity prices. This briefly talks about the correlation between these 3 types of assets. The beginning section is a weekly recap from Vanguard. The final section gives some trivia about the human body.
I do want to mention the Relay for Life event on June 3rd and 4th to raise money for the American Cancer Society. This week, 3 more people became sponsors which is a wonderful thing and I do a 25% match to their donations. Please join the list, we all know way too many people impacted by cancer. If you want to make a donation let me know and if it is based upon distance, I plan on walking at least 40 miles.
Vanguard
Steep gasoline prices impacted key indicators this week as major sectors of the economy felt the squeeze of high fuel costs. Prices paid by producers and consumers rose at their fastest 12-month clip in more than two years while retailers also endured the impact of high energy costs. Economists are thus keeping a sharp eye on inflation, though upward pressure shows some signs of easing. For the week ended May 13, the S&P 500 Index fell 0.2% to 1,338 (for a year-to-date total return—including price change plus dividends—of about 7.1%). The yield of the 10-year U.S. Treasury note fell 1 basis point to 3.18% (for a year-to-date drop of 12 basis points).
Stocks, Long Term Bonds, and Commodities
These 3 asset classes represent most things that impact our day to day lives. Long term bond rates impact lending rates, like mortgages. Commodities impact us at the pump, grocery store, etc. Stocks impact the average investor that invests in a stock or a mutual fund. So the question is does their performance relate and can it be correlated? The answer is that they are loosely related and a correlation factor can be calculated which changes with time.
Generally speaking, in a growing economy stock prices rise, long term bond rates rise (price drops), and commodity prices rise. The reason is that corporations will grow giving better profits and allowing for hiring of more people. Commodity prices rise due to higher demand from companies and people who have more money. Long term bond rates rise as investors sell long term treasury bonds to purchase stocks and commodities.
Generally speaking, in a slowing economy the opposite happens. Commodities are traded on exchanges around the world and people invest in them by buying them directly, purchasing stock in a company, or purchasing a mutual fund/ETF. Since commodities are traded worldwide the value of a currency will impact the prices. This means if the value of the US Dollar declines 10% that the cost of commodities that we import will increase by 10%, another reason to solve our Federal debt problem.
This relationship breaks down when commodity prices get so high that it impacts the ability for a company to make a profit or us consumers to purchase day to day items. Normally, when things act wild it means that an investment class is at a resistance level. This suggests that the rise in commodity prices has peaked for now and any talk of commodity prices continuing to rise this year, such as gas prices over $5/gallon, does not make much sense to me. Longer term, higher commodity prices make sense with an improving global economy and our growing Federal debt.
If you are concerned about having to pay higher prices at the pump or in the store own a mutual fund that invests in commodities. If commodity prices rise you make money to cover the added expense. If commodity prices fall you have more money in your pocket. Some food for thought on how to look at this issue from both sides.
The Amazing Human Body
• There are 230 joints in the human body.
• The average length of arteries, capillaries and veins in the human body is 62,000 miles.
• It has been medically proven that laughter helps control pain, lower blood pressure and relieve stress.
• Most able people will walk 115,000 miles in their life-time – or around the world 4 ½ times.
I do want to mention the Relay for Life event on June 3rd and 4th to raise money for the American Cancer Society. This week, 3 more people became sponsors which is a wonderful thing and I do a 25% match to their donations. Please join the list, we all know way too many people impacted by cancer. If you want to make a donation let me know and if it is based upon distance, I plan on walking at least 40 miles.
Vanguard
Steep gasoline prices impacted key indicators this week as major sectors of the economy felt the squeeze of high fuel costs. Prices paid by producers and consumers rose at their fastest 12-month clip in more than two years while retailers also endured the impact of high energy costs. Economists are thus keeping a sharp eye on inflation, though upward pressure shows some signs of easing. For the week ended May 13, the S&P 500 Index fell 0.2% to 1,338 (for a year-to-date total return—including price change plus dividends—of about 7.1%). The yield of the 10-year U.S. Treasury note fell 1 basis point to 3.18% (for a year-to-date drop of 12 basis points).
Stocks, Long Term Bonds, and Commodities
These 3 asset classes represent most things that impact our day to day lives. Long term bond rates impact lending rates, like mortgages. Commodities impact us at the pump, grocery store, etc. Stocks impact the average investor that invests in a stock or a mutual fund. So the question is does their performance relate and can it be correlated? The answer is that they are loosely related and a correlation factor can be calculated which changes with time.
Generally speaking, in a growing economy stock prices rise, long term bond rates rise (price drops), and commodity prices rise. The reason is that corporations will grow giving better profits and allowing for hiring of more people. Commodity prices rise due to higher demand from companies and people who have more money. Long term bond rates rise as investors sell long term treasury bonds to purchase stocks and commodities.
Generally speaking, in a slowing economy the opposite happens. Commodities are traded on exchanges around the world and people invest in them by buying them directly, purchasing stock in a company, or purchasing a mutual fund/ETF. Since commodities are traded worldwide the value of a currency will impact the prices. This means if the value of the US Dollar declines 10% that the cost of commodities that we import will increase by 10%, another reason to solve our Federal debt problem.
This relationship breaks down when commodity prices get so high that it impacts the ability for a company to make a profit or us consumers to purchase day to day items. Normally, when things act wild it means that an investment class is at a resistance level. This suggests that the rise in commodity prices has peaked for now and any talk of commodity prices continuing to rise this year, such as gas prices over $5/gallon, does not make much sense to me. Longer term, higher commodity prices make sense with an improving global economy and our growing Federal debt.
If you are concerned about having to pay higher prices at the pump or in the store own a mutual fund that invests in commodities. If commodity prices rise you make money to cover the added expense. If commodity prices fall you have more money in your pocket. Some food for thought on how to look at this issue from both sides.
The Amazing Human Body
• There are 230 joints in the human body.
• The average length of arteries, capillaries and veins in the human body is 62,000 miles.
• It has been medically proven that laughter helps control pain, lower blood pressure and relieve stress.
• Most able people will walk 115,000 miles in their life-time – or around the world 4 ½ times.
Sunday, October 17, 2010
Bank Stocks
The news this past week, other than the rescue of the miners in Chile, was on suspending mortgage foreclosures and the impact on bank stocks. This newsletter will look at bank stocks, in particular Bank of America, and the impact of suspending mortgage foreclosures. First will be weekly recap by Vanguard and at the end will be some trivia on Columbus Day which also occurred last week.
Vanguard
If you're old enough to remember the 1970s, you may think inflation is a dirty word. Lately, though, some economists (joined, this week, by the chairman of the Federal Reserve) have dared to utter an even dirtier one: deflation. For the week ended October 15, the S&P 500 Index rose 0.9% to 1,176 (for a year-to-date total return—including price change plus dividends—of about 7.1%). The yield of the 10-year U.S. Treasury note rose 16 basis points to 2.57% (for a year-to-date decrease of 128 basis points).
Bank of America Stock
This is one of a few stocks that I have previously recommended. This recommendation is a result of the company acquiring Countrywide Mortgage and Merrill Lynch Investments during the financial crisis at a bargain basement cost without issuing shares of stock for the purchases. Anytime a company can grow revenue and profit without issuing more shares is very positive for a stock holder. Since the acquisition, additional shares have been issued but not as many as the sum total of the 3 companies.
As far as the item in the news, the delay in foreclosures, it would have been a lot better if we would have had these delays when the loans were being made. So instead of doing due diligence when the loans were issued we are now researching if the loans were done properly, it think this is called looking at the technicalities now instead of looking at the fundamentals when the loan was made. Ultimately, a mortgage loan has to be either paid or the property goes back to the originator as stated in the contract. The best thing for everyone is for economic prosperity to return to our country so that this foreclosure issue goes away and people can pay their loan.
Bank of America stock went down 11% last week because of this issue. The concerns include: higher costs associated with the issue reducing profits, loss of revenue ie. mortgage payments, and uncertainty about the future for these loans. The size of the drop does not make sense to me.
The real question is what does this mean for an investor and the future price of Bank of America stock given that they report earnings in 2 days? Since morgage loans are a fraction of the business and they are not getting revenue anyway from these loans that are in the foreclosure process the impact on earnings will probably not be very large. This looks more like a footnote item rather than a headlline item.
If you are an investor with a short term time horizon that is nervous about the issue then selling on a price rebound makes sense. If you are an investor with a long term horizon then holding and buying more makes sense. I would be much more nervous if Bank of America only did mortgages. An improving economy is always good for a bank stock.
Columbus Day Trivia
A U.S. national holiday since 1937, Columbus Day commemorates the arrival of Christopher Columbus in the New World on October 12, 1492. The Italian-born explorer had set sail two months earlier, backed by the Spanish monarchs King Ferdinand and Queen Isabella. He intended to chart a western sea route to China, India and the fabled gold and spice islands of Asia; instead, he landed in the Bahamas, becoming the first European to explore the Americas since the Vikings set up colonies in Greenland and Newfoundland during the 10th century.
Later that month, Columbus sighted Cuba and believed it was mainland China; in December the expedition found Hispaniola, which he though might be Japan. There, he established Spain's first colony in the Americas with 39 of his men. In March 1493, the explorer returned to Spain in triumph, bearing gold, spices and "Indian" captives. He crossed the Atlantic several more times before his death in 1506; by his third journey, he realized that he hadn't reached Asia but instead had stumbled upon a continent previously unknown to Europeans.
The first Columbus Day celebration took place in 1792, when New York's Columbian Order–better known as Tammany Hall–held an event to commemorate the historic landing's 300th anniversary. Taking pride in Columbus' birthplace and faith, Italian and Catholic communities in various parts of the country began organizing annual religious ceremonies and parades in his honor. In 1892, President Benjamin Harrison issued a proclamation encouraging Americans to mark the 400th anniversary of Columbus' voyage with patriotic festivities, writing, "On that day let the people, so far as possible, cease from toil and devote themselves to such exercises as may best express honor to the discoverer and their appreciation of the great achievements of the four completed centuries of American life."
In 1937, President Franklin D. Roosevelt proclaimed Columbus Day a national holiday, largely as a result of intense lobbying by the Knights of Columbus, an influential Catholic fraternal benefits organization. Originally observed every October 12, it was fixed to the second Monday in October in 1971.
Vanguard
If you're old enough to remember the 1970s, you may think inflation is a dirty word. Lately, though, some economists (joined, this week, by the chairman of the Federal Reserve) have dared to utter an even dirtier one: deflation. For the week ended October 15, the S&P 500 Index rose 0.9% to 1,176 (for a year-to-date total return—including price change plus dividends—of about 7.1%). The yield of the 10-year U.S. Treasury note rose 16 basis points to 2.57% (for a year-to-date decrease of 128 basis points).
Bank of America Stock
This is one of a few stocks that I have previously recommended. This recommendation is a result of the company acquiring Countrywide Mortgage and Merrill Lynch Investments during the financial crisis at a bargain basement cost without issuing shares of stock for the purchases. Anytime a company can grow revenue and profit without issuing more shares is very positive for a stock holder. Since the acquisition, additional shares have been issued but not as many as the sum total of the 3 companies.
As far as the item in the news, the delay in foreclosures, it would have been a lot better if we would have had these delays when the loans were being made. So instead of doing due diligence when the loans were issued we are now researching if the loans were done properly, it think this is called looking at the technicalities now instead of looking at the fundamentals when the loan was made. Ultimately, a mortgage loan has to be either paid or the property goes back to the originator as stated in the contract. The best thing for everyone is for economic prosperity to return to our country so that this foreclosure issue goes away and people can pay their loan.
Bank of America stock went down 11% last week because of this issue. The concerns include: higher costs associated with the issue reducing profits, loss of revenue ie. mortgage payments, and uncertainty about the future for these loans. The size of the drop does not make sense to me.
The real question is what does this mean for an investor and the future price of Bank of America stock given that they report earnings in 2 days? Since morgage loans are a fraction of the business and they are not getting revenue anyway from these loans that are in the foreclosure process the impact on earnings will probably not be very large. This looks more like a footnote item rather than a headlline item.
If you are an investor with a short term time horizon that is nervous about the issue then selling on a price rebound makes sense. If you are an investor with a long term horizon then holding and buying more makes sense. I would be much more nervous if Bank of America only did mortgages. An improving economy is always good for a bank stock.
Columbus Day Trivia
A U.S. national holiday since 1937, Columbus Day commemorates the arrival of Christopher Columbus in the New World on October 12, 1492. The Italian-born explorer had set sail two months earlier, backed by the Spanish monarchs King Ferdinand and Queen Isabella. He intended to chart a western sea route to China, India and the fabled gold and spice islands of Asia; instead, he landed in the Bahamas, becoming the first European to explore the Americas since the Vikings set up colonies in Greenland and Newfoundland during the 10th century.
Later that month, Columbus sighted Cuba and believed it was mainland China; in December the expedition found Hispaniola, which he though might be Japan. There, he established Spain's first colony in the Americas with 39 of his men. In March 1493, the explorer returned to Spain in triumph, bearing gold, spices and "Indian" captives. He crossed the Atlantic several more times before his death in 1506; by his third journey, he realized that he hadn't reached Asia but instead had stumbled upon a continent previously unknown to Europeans.
The first Columbus Day celebration took place in 1792, when New York's Columbian Order–better known as Tammany Hall–held an event to commemorate the historic landing's 300th anniversary. Taking pride in Columbus' birthplace and faith, Italian and Catholic communities in various parts of the country began organizing annual religious ceremonies and parades in his honor. In 1892, President Benjamin Harrison issued a proclamation encouraging Americans to mark the 400th anniversary of Columbus' voyage with patriotic festivities, writing, "On that day let the people, so far as possible, cease from toil and devote themselves to such exercises as may best express honor to the discoverer and their appreciation of the great achievements of the four completed centuries of American life."
In 1937, President Franklin D. Roosevelt proclaimed Columbus Day a national holiday, largely as a result of intense lobbying by the Knights of Columbus, an influential Catholic fraternal benefits organization. Originally observed every October 12, it was fixed to the second Monday in October in 1971.
Sunday, August 22, 2010
Stocks vs. Stock Mutual Funds
This newsletter also includes the usual info from Vanguard as well as a short segment on stocks versus stock mutual funds.
Vanguard Weekly Recap
The U.S. economy continues in sputter mode. While July saw some improvements in industrial production and housing starts, the most recent initial unemployment claims rose for a third straight week. For the week ended August 20, the S&P 500 Index fell 0.7%, to 1,072 (for a year-to-date total return—including price change plus dividends—of about -2.7%). The yield of the 10-year U.S. Treasury note dropped 6 basis points to 2.62% (for a year-to-date decrease of 123 basis points).
Stocks vs Stock Mutual Funds
The environment for owning stocks has drastically changed since the advent of low cost on-line stock trading. Brokerage houses still desire to make more money each year so that they can grow and pay people very very very nice bonuses. The only way their revenue can grow with this low cost on-line stock trading environment is to get investors to buy and sell a whole lot more often. On Mad Money, Cramer of Cramerica will tell you to Buy Buy Buy or Sell Sell Sell a specific stock and his viewing audience is to follow his recommendation like he has divine knowledge.
It use to be that you bought a stock and held onto it because the environment for stocks was fairly normal, a buy and hold strategy. Today stocks are much more manipulated as an individual or a group of individuals can move a stock up or down in a major way. These brokerage houses have computer programs that execute trades based upon a number of factors including momentum.
So what should you do if you like to own stocks? Do not get married to them, follow them, and be willing to take a profit. Brokerage houses have hired psychologists to study investor behavior and the higher the stock price the more likely an individual is likely to buy it and conversely the lower the stock price the more likely an individual is likely to sell it. The reason is an individual investor tends to get emotionally attached and feels successful when their stock is successful and vice versa. Brokerage houses tend to do analysis, I did read a very thick and boring book on security analysis some years ago, and will tend to do the opposite of the individual investors.
An individual stock can be moved in a fashion that is not logical and is out of your control. It can go to $0.00 and you can lose 100% of your money. It is hard to know if you should buy, sell or hold a stock when you are in a competition with a brokerage house with computer programs that do security analysis and is funding TV shows and analysts to get you to make a trade. In a trade, every seller must find a buyer.
My opinion is that the average investor should only have about 10% of their holdings in individual stocks. A mutual fund that invests in individual stocks has much less risk due to diversification and performance can not be influenced to the same extent by outside forces.
If you find that you have a relatively high loading of stocks, my advice is to use a rebound in the stock market, that is stuck in a trading range, as an opportunity to sell. While it is fun to watch a stock to go up, it makes you feel good, the going down is a terrible ride. A bird in the hand is indeed worth 2 in the bush.
Six Tips For A College Freshman
#1 The first week defines the rest of the year
#2 Organize Study Groups!
#3 Study for tests!
#4 Get involved
#5 If you don’t like your roommate, switch
#6 Go to sporting events
Vanguard Weekly Recap
The U.S. economy continues in sputter mode. While July saw some improvements in industrial production and housing starts, the most recent initial unemployment claims rose for a third straight week. For the week ended August 20, the S&P 500 Index fell 0.7%, to 1,072 (for a year-to-date total return—including price change plus dividends—of about -2.7%). The yield of the 10-year U.S. Treasury note dropped 6 basis points to 2.62% (for a year-to-date decrease of 123 basis points).
Stocks vs Stock Mutual Funds
The environment for owning stocks has drastically changed since the advent of low cost on-line stock trading. Brokerage houses still desire to make more money each year so that they can grow and pay people very very very nice bonuses. The only way their revenue can grow with this low cost on-line stock trading environment is to get investors to buy and sell a whole lot more often. On Mad Money, Cramer of Cramerica will tell you to Buy Buy Buy or Sell Sell Sell a specific stock and his viewing audience is to follow his recommendation like he has divine knowledge.
It use to be that you bought a stock and held onto it because the environment for stocks was fairly normal, a buy and hold strategy. Today stocks are much more manipulated as an individual or a group of individuals can move a stock up or down in a major way. These brokerage houses have computer programs that execute trades based upon a number of factors including momentum.
So what should you do if you like to own stocks? Do not get married to them, follow them, and be willing to take a profit. Brokerage houses have hired psychologists to study investor behavior and the higher the stock price the more likely an individual is likely to buy it and conversely the lower the stock price the more likely an individual is likely to sell it. The reason is an individual investor tends to get emotionally attached and feels successful when their stock is successful and vice versa. Brokerage houses tend to do analysis, I did read a very thick and boring book on security analysis some years ago, and will tend to do the opposite of the individual investors.
An individual stock can be moved in a fashion that is not logical and is out of your control. It can go to $0.00 and you can lose 100% of your money. It is hard to know if you should buy, sell or hold a stock when you are in a competition with a brokerage house with computer programs that do security analysis and is funding TV shows and analysts to get you to make a trade. In a trade, every seller must find a buyer.
My opinion is that the average investor should only have about 10% of their holdings in individual stocks. A mutual fund that invests in individual stocks has much less risk due to diversification and performance can not be influenced to the same extent by outside forces.
If you find that you have a relatively high loading of stocks, my advice is to use a rebound in the stock market, that is stuck in a trading range, as an opportunity to sell. While it is fun to watch a stock to go up, it makes you feel good, the going down is a terrible ride. A bird in the hand is indeed worth 2 in the bush.
Six Tips For A College Freshman
#1 The first week defines the rest of the year
#2 Organize Study Groups!
#3 Study for tests!
#4 Get involved
#5 If you don’t like your roommate, switch
#6 Go to sporting events
Saturday, July 31, 2010
Changing Investment Sentiment and Risk of Owning Individual Stocks
What a week, the dog days of summer are here and the action on Wall Street is hot. This newsletter gives a weekly recap from Vanguard, changing investment sentiment, risk of owning individual stocks, and some trivia for your enoyment. You and your investments need to stay cool for the rest of the summer.
Vanguard Weely Recap
The Commerce Department's report on gross domestic product (GDP) for the second quarter confirmed what many had expected: Although the economy has grown for the fourth straight quarter, the rate of growth has slowed. Moreover, the nation's recovery from recession has been tougher than previously thought, based on revised GDP figures indicating that the economy from 2007 to 2009 was weaker than originally estimated. For the week, the S&P 500 Index fell 0.1% to 1,102 (for a year-to-date total return—including price change plus dividends—of about -0.1%). The yield of the 10-year U.S. Treasury note fell 8 basis points to 2.94% (for a year-to-date decrease of 91 basis points).
Changing Investment Sentiment
As you read in the Vanguard Weekly Recap, this week on Friday, it was stated that the economy did not grow as fast as anticipated in the second quarter. The result was a drop in long term interest rates and the stock market yawned. This is the first time this summer that news like this did not send the VIX skyward and the stock market tumbling.
We have a change in investment sentiment and this is positive for the stock market. How did this happen? Thursday night on Bloomberg TV the Finance Minister for France was interviewed and gave a very upbeat report about the future. The statements were that a double dip recession would not occur, during 2011 the global economy would grow by 4%, and employment would grow worldwide. France is working simultaneously to control debt and grow their economy, something badly needed in the USA. I admit that I live a boring life by watching Bloomberg TV.
Risk of Owning Individual Stocks
This week CommScope reported second quarter financial results with revenue and earnings exceeding expectations. The stock was punished for the next 2 days dropping about 25%. Normally, one would think that good news would be rewarded. So what happened? The revenue for the next quarter was forecasted slightly below expectations and some large investors gave a vote of no confidence and ran for the exits. CommScope had top ratings by several investment guidance services such as the Motley Fool.
This points out a few important points about owning individual stocks:
* It is common for stocks to have much larger up and down swings from the rest of the market. We enjoy the large upswings.
* Results for the previous quarter do not matter, investing is about what will happen in the future. You can not invest by looking backward.
* Investment guidance experts do lots of research and select good companies based upon metrics and they can not predict the future just like trying to predict the weather.
Trivia
"Dog Days" (Latin: diēs caniculārēs) are the hottest, most sultry days of summer. In the northern hemisphere, they usually fall between early July and early September. In the southern hemisphere they are usually between January and early March. The actual dates vary greatly from region to region, depending on latitude and climate. Dog Days can also define a time period or event that is very hot or stagnant, or marked by dull lack of progress. The name comes from the ancient belief that Sirius, also called the Dog Star, was somehow responsible for the hot weather.
Vanguard Weely Recap
The Commerce Department's report on gross domestic product (GDP) for the second quarter confirmed what many had expected: Although the economy has grown for the fourth straight quarter, the rate of growth has slowed. Moreover, the nation's recovery from recession has been tougher than previously thought, based on revised GDP figures indicating that the economy from 2007 to 2009 was weaker than originally estimated. For the week, the S&P 500 Index fell 0.1% to 1,102 (for a year-to-date total return—including price change plus dividends—of about -0.1%). The yield of the 10-year U.S. Treasury note fell 8 basis points to 2.94% (for a year-to-date decrease of 91 basis points).
Changing Investment Sentiment
As you read in the Vanguard Weekly Recap, this week on Friday, it was stated that the economy did not grow as fast as anticipated in the second quarter. The result was a drop in long term interest rates and the stock market yawned. This is the first time this summer that news like this did not send the VIX skyward and the stock market tumbling.
We have a change in investment sentiment and this is positive for the stock market. How did this happen? Thursday night on Bloomberg TV the Finance Minister for France was interviewed and gave a very upbeat report about the future. The statements were that a double dip recession would not occur, during 2011 the global economy would grow by 4%, and employment would grow worldwide. France is working simultaneously to control debt and grow their economy, something badly needed in the USA. I admit that I live a boring life by watching Bloomberg TV.
Risk of Owning Individual Stocks
This week CommScope reported second quarter financial results with revenue and earnings exceeding expectations. The stock was punished for the next 2 days dropping about 25%. Normally, one would think that good news would be rewarded. So what happened? The revenue for the next quarter was forecasted slightly below expectations and some large investors gave a vote of no confidence and ran for the exits. CommScope had top ratings by several investment guidance services such as the Motley Fool.
This points out a few important points about owning individual stocks:
* It is common for stocks to have much larger up and down swings from the rest of the market. We enjoy the large upswings.
* Results for the previous quarter do not matter, investing is about what will happen in the future. You can not invest by looking backward.
* Investment guidance experts do lots of research and select good companies based upon metrics and they can not predict the future just like trying to predict the weather.
Trivia
"Dog Days" (Latin: diēs caniculārēs) are the hottest, most sultry days of summer. In the northern hemisphere, they usually fall between early July and early September. In the southern hemisphere they are usually between January and early March. The actual dates vary greatly from region to region, depending on latitude and climate. Dog Days can also define a time period or event that is very hot or stagnant, or marked by dull lack of progress. The name comes from the ancient belief that Sirius, also called the Dog Star, was somehow responsible for the hot weather.
Sunday, May 17, 2009
Stocks and 30 Year Treasuries
What a week in the auto industry. Chrysler, aka Crysler, and General Motors, aka Government Motors, announced the closing of about 2000 dealership. These dealerships were chosen by some reason probably not related to profitability of the individual dealer. Most people associated with Crysler and Government Motors are probably thinking why did we ask the government for money. Be careful what you wish for cause you just might get it.
About 8 months ago, Barrons had a nice article on why GM was a good buy at $25/share. I did not buy the stock then and still do not plan to buy it in the future. The reason for my decision is the metric of pension funding versus shareholder equity which says that funding pensions will cost more than the company is worth. This very smart person had great reasons on the surface but did not get to the real issue. GM hit a 76 year low this week at about $1/share. The moral of the story is be very very selective in buying an stock, I currently like only 4 stocks. You are better off to buy a few that you know very very well than just starting to buy based upon some very smart analyst. Better yet you are probably better off buying a highly rated mutual fund with low fees.
I have been saying that you want to avoid long term bonds. The latest issue of Barrons had an article stating that the 30 year treasury bond has lost 20% this year and this investment should be avoided. The reason is that government spending is causing interest rates to go up and this trend will continue. What does government spending at an annual deficit of a $2 trillion get us:
1) Higher interest rates
2) Losing money on long term bonds
3) Drop in the value of the dollar relative to other currencies
4) Higher prices for commodities that are imported like oil
For someone looking for fixed income, some good alternatives exist in bond funds that invest in corporate bonds and municipal bonds. If you go this route your return will be higher than a money market fund or CD.
About 8 months ago, Barrons had a nice article on why GM was a good buy at $25/share. I did not buy the stock then and still do not plan to buy it in the future. The reason for my decision is the metric of pension funding versus shareholder equity which says that funding pensions will cost more than the company is worth. This very smart person had great reasons on the surface but did not get to the real issue. GM hit a 76 year low this week at about $1/share. The moral of the story is be very very selective in buying an stock, I currently like only 4 stocks. You are better off to buy a few that you know very very well than just starting to buy based upon some very smart analyst. Better yet you are probably better off buying a highly rated mutual fund with low fees.
I have been saying that you want to avoid long term bonds. The latest issue of Barrons had an article stating that the 30 year treasury bond has lost 20% this year and this investment should be avoided. The reason is that government spending is causing interest rates to go up and this trend will continue. What does government spending at an annual deficit of a $2 trillion get us:
1) Higher interest rates
2) Losing money on long term bonds
3) Drop in the value of the dollar relative to other currencies
4) Higher prices for commodities that are imported like oil
For someone looking for fixed income, some good alternatives exist in bond funds that invest in corporate bonds and municipal bonds. If you go this route your return will be higher than a money market fund or CD.
Monday, March 16, 2009
Buying Opportunity in Stocks
Topic: Wonderful Buying Opportunity for Longer Term Investors in the US and International Stock Markets
Last week’s newsletter covered the topic of Irrational Pessimism where investors were acting in an irrationally pessimistic manner to some investment options, such as the stock market. The stock market rebounded about 10% during the week and was higher on 4 consecutive days.
Financial experts on the news channels continue to be rather pessimistic. The current topic being debated is the question was last week’s low in the stock market really the bottom? Having these experts being pessimistic creates a wonderful opportunity for longer term investors in the stock market.
The stock market moves with the growth in the US and global economy rather than the opinion of the financial experts. The best indicators are economic data, the price of commodities, especially copper, and interest rates. Economic data indicates that the economy has changed from a severe contraction to approaching neutral. Commodity prices have begun to rise and copper prices having risen appreciably during the last 3 months also suggesting that the economy has improved. Interest rates have also increased during the last 3 months.
In this economic environment what are the most important things to do in order of importance? First, eliminate revolving credit card debt and get rid of this obligation that has an interest rate of about 20%. Second, refinance your home at a lower interest rate, if the rate is over 5.5%, to improve monthly cash flow. Third, payoff any loans on a liability like a car since it is throwing good money after something that is going down in value. Finally, continue to contribute to a retirement plan.
If you have a short term time horizon or are an extremely risk averse investor continue to put money in a money market account or certificate of deposit. A money market at Fidelity is currently yielding about 3%.
A longer term investor should maintain investments in the stock market and continue to make contributions primarily through mutual funds rather than picking an individual stock. An individual stocks carries considerably more risk than a mutual fund.
Things to avoid buying right now: Gold, Long Term Bonds, and Real Estate Investment Trusts. Each of these options will be covered in future blogs.
Last week’s newsletter covered the topic of Irrational Pessimism where investors were acting in an irrationally pessimistic manner to some investment options, such as the stock market. The stock market rebounded about 10% during the week and was higher on 4 consecutive days.
Financial experts on the news channels continue to be rather pessimistic. The current topic being debated is the question was last week’s low in the stock market really the bottom? Having these experts being pessimistic creates a wonderful opportunity for longer term investors in the stock market.
The stock market moves with the growth in the US and global economy rather than the opinion of the financial experts. The best indicators are economic data, the price of commodities, especially copper, and interest rates. Economic data indicates that the economy has changed from a severe contraction to approaching neutral. Commodity prices have begun to rise and copper prices having risen appreciably during the last 3 months also suggesting that the economy has improved. Interest rates have also increased during the last 3 months.
In this economic environment what are the most important things to do in order of importance? First, eliminate revolving credit card debt and get rid of this obligation that has an interest rate of about 20%. Second, refinance your home at a lower interest rate, if the rate is over 5.5%, to improve monthly cash flow. Third, payoff any loans on a liability like a car since it is throwing good money after something that is going down in value. Finally, continue to contribute to a retirement plan.
If you have a short term time horizon or are an extremely risk averse investor continue to put money in a money market account or certificate of deposit. A money market at Fidelity is currently yielding about 3%.
A longer term investor should maintain investments in the stock market and continue to make contributions primarily through mutual funds rather than picking an individual stock. An individual stocks carries considerably more risk than a mutual fund.
Things to avoid buying right now: Gold, Long Term Bonds, and Real Estate Investment Trusts. Each of these options will be covered in future blogs.
Saturday, October 11, 2008
Investing, Time to Get Ready to Buy Stocks
The guidance from the last blog last week was to hold your investment positions for a number of reasons. The guidance now is to get ready to buy stocks and let the market tell you when to buy as stocks are ON SALE NOW.
This past week, we had the worst performance on record even worse than during the depression. Let's recap:
This past week, we had the worst performance on record even worse than during the depression. Let's recap:
- Virtually all investments crashed: stocks, bonds, and commodites except for gold.
- Stocks dropped the largest point total and percentage amount ever.
- Investors pulled money out of the market and put it into cash in large chunks.
- On Friday, we had a 1000+ point swing and got within about 5% of the low during the last correction.
- On Friday, we had about 10 times the normal volume on the NYSE, 11.5 billion shares.
- As you check any US or international mutual fund it seems that it has lost about half of the value.
- If you want to see what a financial shock looks like as yourself did you really want to look at your account balance or your mutual fund performance???
If we got within 5% of the previous correction this means that we probably know where the bottom will occur, Notice investors bought stocks to achieve a 1,000 point swing. THIS MEANS THAT THE STOCK MARKET IS NOW ON SALE, TIME TO BUY!!!!!
When do you know when it is a bottom? When bad news comes in and the stock market goes up anyway.
When you see this happen you can buy literally any US or international mutual fund as virtually all of them were punished. You want to avoid gold as it will fall and act like the other commodities as the crisis ends. You want to avoid bonds as interest rates will rise and price will fall as the crisis ends.
Sunday, October 5, 2008
US Stocks Market Index, Buy Sell or Hold
The highly touted bailout bill passed last week and the stocks reacted by falling. The most recent 3rd quarter was brutal for even the most seasoned investor. During the last year, from October 1, 2007 to October 1, 2008, the US stock indexes are down about 30%. WOW, the average investor lost about 1/3rd of their money during the last year.
The news on TV and in the newspaper is fear and panic. Non-financial experts are talking about how bad things are things can get worse. When these experts talk about how bad things are and a feeling of panic is in the news it typically means that we are about at a market bottom.
At a market peak the news will be how wonderful things are and people will have a normal reaction of buying. At a market bottom the news will be how bad things are and people will have a normal reaction of selling. If the object is to buy low and sell high, then this strategy is exactly wrong.
What is best choice now between buy, sell, or hold US stocks? The answer is hold and if you have some cash that is not needed within the next year do some buying. Do not sell just for the sake of selling. While it impossible to know the absolute bottom, going down much further would be rather unprecedented.
What is the reasoning behind holding:
The news on TV and in the newspaper is fear and panic. Non-financial experts are talking about how bad things are things can get worse. When these experts talk about how bad things are and a feeling of panic is in the news it typically means that we are about at a market bottom.
At a market peak the news will be how wonderful things are and people will have a normal reaction of buying. At a market bottom the news will be how bad things are and people will have a normal reaction of selling. If the object is to buy low and sell high, then this strategy is exactly wrong.
What is best choice now between buy, sell, or hold US stocks? The answer is hold and if you have some cash that is not needed within the next year do some buying. Do not sell just for the sake of selling. While it impossible to know the absolute bottom, going down much further would be rather unprecedented.
What is the reasoning behind holding:
- A 30% drop historically represents the low end of the distribution for the US Stock market.
- The average length of a bear market is about 14 months and we are at 12 months.
- The current financial data does not support the US Stock market going down further. A warning is that when the market runs on emotion it is very difficult to know the bottom.
It makes sense to sell to obtain a tax break in certain accounts. This is best done by buying a similar asset and holding it for 31 days or more before repurchasing the asset. It may also make sense if you need cash in the near future.
When fear and panic exist keep your wits about you. You want a diversified portfolio of excellent mutual funds that can weather a financial storm.
If you need assistance with building such a portfolio, contact an investment professional.
Monday, April 14, 2008
Stocks or Mutual Funds
An investor has an option when it comes to buying equities, individual stocks are a mutual fund that contains a group of stocks. The mutual fund gives diversification in a variety of stocks. An individual stock has no diversification and has considerable more risk because it has unlimited upside potential and can theoretically go to $0.00. For the savvy investor which one is best an individual stock or a Mutual Fund? My answer is a mutual fund.
Reasons to Own a Mutual Fund
While a stock has considerable risk a belief seems to exist that a person can get sufficient information to know when to buy or sell it. I think this is absolutely false. Let's look at the events around General Electric, GE on Friday, April 11th.
Certainly GE has been a darling on Wall Street. On Friday, April 11th, GE announced earnings. Let's go through the sequence of events:
Reasons to Own a Mutual Fund
While a stock has considerable risk a belief seems to exist that a person can get sufficient information to know when to buy or sell it. I think this is absolutely false. Let's look at the events around General Electric, GE on Friday, April 11th.
Certainly GE has been a darling on Wall Street. On Friday, April 11th, GE announced earnings. Let's go through the sequence of events:
- The belief on Wall Street was that earnings would be good and reasons were given by the experts that make a lot of money giving investor advice.
- Earnings missed expectations and a positive spin was put on the results.
- By the end of the day the stock dropped 13%, the worst 1 day decline since the 1987 market crash. This fact came from Barron's April 14, 2008 publication.
- Barron's wrote a wonderful article in this publication, "At GE, One Bad Quarter Doesn't Spoil the Story" by Andrew Bary
The questions are:
- What would you have done if you would have listened to the advice prior to the earning announcement? Lost 13%.
- Why would Barron's publish the article? To sell more publications.
- Why would Andrew Bary write the article? To make money.
- Do people at Barron's or Andrew Bary own GE stock? Most likely.
Bottom Line: Are you getting the total unbiased information from these experts? No. If these experts can't get it right on GE, what makes you believe they will get it right on any stock that you own.
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