TAG | Stock market
by Alexander Green, Investment U Chief Investment Strategist
Monday, January 02, 2012: Issue #1677
Investors are scared right now and it’s not hard to see why.
Economic growth is anemic. Unemployment is high. Banks are saddled with toxic assets. Problems in the Eurozone continue to fester. Residential real estate is sinking in a mire of short sales and foreclosures. And both federal and state governments – not to mention consumers themselves – are drowning in a sea of red ink.
We have all heard these negatives repeated daily and cycled endlessly in the national media.
However, these reports often leave out or play down the good news: Inflation is low. Short-term rates are near zero. Energy and food prices are declining. Emerging market economies – which are end markets for the developed world – are still booming. Corporate profits are at an all-time record – and have been for seven quarters now. And stock valuations are low. (The S&P 500 has historically traded at an average of 16 times earnings. Today it’s less than 14 times earnings.)
Last year I shared another key insight with you. It has always been a positive indicator for stocks when the Dow yields more than Treasury bonds.
This makes sense when you think about it. Shares are riskier than bonds. Investors should demand a higher yield. Yet almost never since 1958 have stocks yielded more than Treasuries. Today they do, however. The 10-year bond yields just two percent. The Dow yields 30 percent more.
If you’re still not convinced that equities are a good place to be in 2012, let me draw your attention to one of the strongest indicators of all…
Contrarian Investing Works
It’s a truism that no one consistently predicts the stock market. (That’s why money manager and Forbes 400 member Ken Fisher calls it “The Great Humiliator.”) However, there’s a straightforward system that offers a reasonable prospect of timing the market reasonably well in the future.
A 25-year study published last year in The Journal of Financial Economics found that if you had simply invested in the S&P 500 when equity fund flows were negative (redemptions exceeded new investments) and into 90-day Treasury bills when fund flows were positive (new investments exceeded redemptions) you would have substantially outperformed the market while spending nearly half the time in riskless T-bills.
In other words, contrarian investing works. This system would have you do the very inverse of what the great mass of investors is doing. (It turns out they have god-awful instincts, so it pays to buck the consensus.)
Bear in mind, if you’d followed this system, you wouldn’t just have earned higher returns than being fully invested. You would have done it with far less risk, spending nearly half the time in riskless T-bills.
I mention this because the Investment Company Institute recently reported that investors are yanking billions out of equity funds virtually every week and pouring the money into ultra-low-paying money market accounts. The Wall Street Journal further reports that “investors have continued to consistently pull money from U.S. equity funds since August.”
I’m trying to contain my glee. Who says no one rings a bell in the stock market?
The fear and pessimism about both the economy and the stock market are way overdone and fully discounted in current stock prices. If you can’t be stirred by low interest rates, low inflation, low valuations and record profits, you really should ask yourself two important questions:
1. Is logic or emotion governing my decision making about my portfolio?
2. If I don’t invest in stocks – the greatest wealth creator of all time – how am I going to meet my long-term financial goals?
We’ll talk more about these issues in the weeks ahead. But, for the record, I think 2012 will be a good year for the stock market and – although virtually no one expects or believes it – perhaps even a barnburner.
Good Investing,
Alexander Green
6
Why This Market Truism Just Isn’t True
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Why This Market Truism Just Isn’t True
by Alexander Green, Investment U Chief Investment Strategist
Monday, December 5, 2011: Issue #1657
In my first book, The Gone Fishin’ Portfolio, I made a confession that startled some readers…
I retired from the investment services industry while I was still in my early 40s, but many of my clients had not become financially independent. This was not because I advised them poorly. I dealt with my clients honestly and gave them the best advice and service I could.
Yet, in many ways, they operated at a disadvantage. Some had a poor understanding of investment fundamentals. Others found it impossible to commit to a long-term investment plan. Many were simply too emotional about the markets, running to cash at the first hint of danger.
Contrarian instincts are rare, too, I learned. Few people are emotionally stirred by low stock prices. But every time there was a correction, a crash, or financial panic, my Scottish blood would surge, my pulse would rise, I’d rub my hands together, and start buying.
My clients, on the other hand, often did just the opposite, sometimes because they were too nervous but often because they bought into the old chestnut that a good investor doesn’t buy into a market downturn.
“The trend is your friend,” they’d say. Or “Don’t try to catch a falling knife.” This is surely the conventional wisdom in some quarters, but it’s not particularly wise. Here’s why …
For the last several months, traders have obsessed over problems in the Eurozone and the strength (or perceived weakness) of the U.S. economy. Taking a decidedly downbeat view, the market had a pretty horrendous November. But sentiment can turn on a dime and stocks can put on a furious – and completely unexpected – rally.
If you don’t already own stocks, it’s tough to catch the train after it has left the station.
Yet many gurus, including growth-stock advocate William O’Neill and his widely read publication Investor’s Business Daily, often insist that you shouldn’t but a stock unless the market itself is in a confirmed uptrend.
That may make sense in theory, but it often fails in practice. For instance, on page one each day, that paper reports whether the market is in a confirmed uptrend or downtrend. (And sometimes hedges, using language such as “Uptrend Under Pressure.”)
As we all know, this has been a volatile year for the market with the major indices bouncing up and down repeatedly. But you could hardly have chosen a worse strategy than to wait until the market was in a confirmed uptrend before buying. All that meant was that you bought into every short-term spike and then hit your trailing stops over and over again. (It must feel like banging your head against the wall.)
The Oxford Club has hit a number of its stops this year, too, sometimes protecting profits, other times protecting principal. But by buying great companies when the market was under pressure, we ended up with a lot of attractive entry points and plenty of both realized and unrealized profits.
True, if stocks go into a secular bear market, you can end with losses no matter how well you timed your entry points. However, you can never know whether a market drop is merely a correction or something more ominous until you are looking in the rear-view mirror.
You have to stick your neck out occasionally, pick your spots and buy stocks. If you don’t, what are you going to do? Buy bonds yielding 2.5 percent? Hold a money market paying less than one-tenth of one percent? It’s tough to beat inflation or meet your financial goals that way.
Let me make one thing clear, however. It’s most definitely a mistake to buy a troubled company that’s in a downtrend, no matter which way the broad market is heading. (That only works for those with exceptionally long time horizons – and often not even then.) But buying great companies when the broad market is a downtrend gives you a chance to obtain good prices on fine long-term investments and take advantage of tradable short-term rallies, too.
The next two months are traditionally one of the strongest periods for the stock market. No one can say, of course, whether that tradition will hold. But it’s a reasonable strategy to buy great companies when the market is down.
If your goal is to sell high, you have to start by buying low. And market corrections – like the one we’ve seen lately – give you an excellent opportunity to do just that.
Good investing,
Alexander Green
25
The Best Trade You Can Make in November
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The Best Trade You Can Make in November
by Alexander Green, Investment U Chief Investment Strategist
Thursday, November 24, 2011: Issue #1650
In December 1996, I sold some shares of Best Buy (NYSE: BBY) to offset gains elsewhere in my portfolio.
I still consider it the most boneheaded investment move I ever made. A year later, the stock was up more than five-fold. A few years further on, it was up more than thirty-fold.
The worst part is that I didn’t dislike the business prospects for Best Buy at the time. Quite the contrary, in fact. I sold it only because I had substantial capital gains and was cleaning out my portfolio to offset them.
I don’t always do that any more. And you shouldn’t necessarily, either. Despite what your tax advisor may tell you, you should never sell an investment for tax reasons alone. Nor do you have to.
Here’s why…
The IRS allows you to offset realized gains with realized losses each calendar year. If you do, however, you must wait at least 30 days before buying the same shares back. (Otherwise you run afoul of the wash-sale rule.)
Offsetting gains at the end of the year is often a sensible move. Most stocks aren’t appreciably higher 30 days later. And if you still like them, you can buy them back then.
There is a risk, however, and it’s called the January effect. The first month of the year is traditionally a strong one for the market. A lot of pension and IRA money gets invested early each year. Plus, there’s often a rebound from the tax-loss selling that goes on each December.
If a stock you own soars in January, there’s a natural reluctance to buy it back. The temptation is to wait until it comes back down. But what if it doesn’t? You’ve taken a limited loss but sold an investment with unlimited upside potential.
There’s a way around this problem, however. And you can take advantage of it – but only if you’re willing to move this week.
In late November each year, I look at my entire portfolio for any companies that are trading below my entry price but NOT near my trailing stops. If I still like a stock, I often make the decision to double down on it for 30 days.
Why? Because I can sell the original shares at the end of December for a tax loss. And if the stock rallies in January, it’s not a problem. After all, thanks to my purchase in November, I own the same number of shares as I bought originally.
What if you don’t have the cash to double down on your position? Use margin. Again, I’m recommending this only for a 30-day period. Your margin interest charge will be minimal.
The risk, of course, is that your shares will be worth less in late December and you will have a paper loss on the second purchase.
However, just the opposite may happen. Remember, the January effect is often preceded by the Santa Claus rally, the tendency of the stock market to do well in the second half of December. As a result, you could end up with a smaller loss in your original shares and a paper gain on your second purchase.
(The Santa Claus rally is never certain, of course, and another reason why you should only add to those companies whose earnings prospects remain strong.)
Bear in mind, when selling for tax purposes, the IRS requires that you buy those identical shares AT LEAST 30 days before you sell the others. So if you want to use this strategy for 2011, you must act this week.
If we have the traditional mid-December to early February rally, you’ll thank me. And then perhaps again on April 15.
Good investing,
Alexander Green
15
The One Place to Invest for Growth, Income… and Safety
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The One Place to Invest for Growth, Income… and Safety
by Alexander Green, Investment U Chief Investment Strategist
Monday, November 14, 2011: Issue #1642
Eight weeks ago, I wrote an Investment U column pounding the table for dividend stocks. Since then, they’ve ratcheted higher, but I still see plenty of upside ahead.
Someone who shares my enthusiasm for high-yield stocks right now is my friend and former colleague Rick Pfeifer, Senior Portfolio Manager at Fund Advisors of America, a Florida-based money management firm.
On a recent trip to the sunshine state, I stopped into his office to hear why he, too, feels this is one of the best places to put your money to work today.
Q: Rick, there’s an awful lot of fear and anxiety about the economy and the stock market right now. Investors are confused and uncertain about what to do with their money. What is your take on things?
A: In a market as volatile as this, you have to spread your bets. But my take is this: If you’re looking for growth, buy dividend-paying stocks.
If you’re looking for income, buy dividend-paying stocks. If you’re looking for safety, buy dividend-paying stocks.
Q: Why?
A: The first question every investor has to ask himself is, “How should I divide my money among stocks, bonds and cash?”
The average money market fund currently pays two one-hundredths of one percent. At that rate, you will double your money in just 3,600 years.
Q: Not terribly attractive.
A: Definitely not.
And Treasury yields won’t make you jump up and click your heels, either. The 10-year guy is yielding two percent, which translates – at best – to a zero-percent yield after inflation.
Q: Tough to meet your investment goals that way.
A: Right.
In my view, dividend stocks are a good place to be right now for several reasons. Let’s talk about safety first. When the Dow traded at these levels 11 ½ years ago, it sold for 47 times earnings. Today it trades at less than 14 times earnings. Stocks are cheap right now on the basis of sales and earnings.
But even during market declines, dividend-paying stocks hold up better than non-dividend-paying stocks and sometimes fight the broad trend and rise in value. The reason is obvious. These tend to be mature, profitable companies with stable outlooks, plenty of cash and long-term staying power.
Q: U.S. companies are sitting on a record amount of cash now, too, right?
A: Correct.
U.S. companies currently hold more than $2 trillion in cash, a record. Thanks to this economy and the current Administration (don’t get me started), companies aren’t hiring and they’re not boosting spending. So a lot of this cash is rightfully going back to shareholders.
The Dow currently yields more than bonds. And dividend growth among U.S. companies has averaged 10 percent per year over the last two years, more than double the long-term dividend growth rate.
Q: Okay. Dividend stocks are less risky than non-dividend payers and currently pay more than cash or bonds. But how do you think this group will perform in the years ahead?
A: We can only use long-term historical performance as a guide, but the numbers are pretty darn encouraging. Over the last 50 years, for instance, the highest 20 percent yielding stocks in the S&P 500 returned 14.2 percent annually.
That’s good enough to double your money every five years – or quadruple it in 10. And if you were even more selective, say investing only in the 10 highest yielding stocks of the 100 largest companies in the S&P 500, your annual return would have been even better, 15.7 percent.
Q: We should add the standard caveat here about past performance and point out that there are risks with dividend stocks, too, right?
A: Indeed. You have to be selective. An investor would be foolish to plunk for a stock just because the dividend is large. The market is full of “dividend traps,” troubled companies that pay hefty dividends to keep investors from bailing out.
Q: How does an investor avoid those?
A: Mainly, by doing his or her homework. You need to look at prospective sales and earnings growth. You have to examine the balance sheet and make sure that the company isn’t too highly leveraged.
You have to note cash balances. And, perhaps most importantly, you need to analyze whether the payout ratio is sustainable.
Q: So can you give us a few examples of high-yielders that have you been buying in your managed accounts lately?
A: I’ve been nibbling at Windstream Corp. (Nasdaq: WIN), a well-run communications and networking company with an 8.3-percent current yield. I like oil and gas producer Enerplus (NYSE: ERF), with its high operating margins and 7.7-percent dividend.
And – this one is a bit different – I’ve been picking up a 10.3-percent yield with the Gabelli Global Gold Trust (AMEX: GGN). There are plenty of other attractive high-yield situations out there, too. They should be owned, of course, as part of a more broadly diversified portfolio.
Q: I agree, Rick. Thanks for your time. Let’s chat about this sector again in a few weeks.
Good investing,
Alexander Green
[Editor's Note: Fund Advisors offers Investment U subscribers a complimentary portfolio review. For more information, feel free to call Rick - or his partner Greg Galloway - at 800.438.3040 or 407.667.4729.]
by Alexander Green, Investment U’s Chief Investment Strategist
Monday, April 25, 2011: Issue #1498
“Buy Japan now?” a friend asked recently. “Are you nuts?”
His sentiment is understandable. Aside from the unfathomable human suffering in Japan over the past several weeks, there have been enormous economic setbacks as well.
Sendai, the biggest port in northeast Japan and a major exporter of auto parts, machinery and marine products, was virtually wiped off the map. Half a dozen oil refineries in the same area, representing a third of the nation’s entire refining capacity, are shut down. Roads, bridges, railways and other major infrastructure have been destroyed. And the Japanese economy – already limping along for most of the past two decades – is also beset with the world’s highest public debt relative to GDP (225%) and a rapidly aging population.
Why would anyone want to invest here?
In my experience, those words accompany virtually every great buying situation. But it takes more than just a lack of interest to create a true contrarian opportunity. Both sentiment and valuations have to be at an extreme.
And that’s certainly the case here…
Japanese Stock Prices Are Less Than Book Value
The average Japanese stock is selling for less than 14 times its annual profit. That’s cheap, and Japanese accounting methods also tend to understate earnings. An even better indicator is found in book values (assets minus liabilities). Stocks around the world (including the United States, Europe and China) currently sell for approximately two times book value. In Japan, they sell for less than book value. By this measure, U.S. stocks are twice as expensive as Japanese stocks.
What will turn Japan’s market around? For starters, the enormous rebuilding that will be required over the next few years. Devastated areas account for seven percent of Japan’s economy and a substantial portion of its land mass. A lot of businesses will receive substantial contracts as a result of the catastrophe.
History shows that Japan is adept at rebounding from catastrophe. (Take World War II or the 1995 Kobe earthquake as examples.) And when Tokyo enters a bull market, it can look like the Silver Spurs Rodeo. For example, if you invested $10,000 in the S&P 500 in 1970, two decades later it would have been worth more than $76,000. Not bad.
But the same amount invested in the Nikkei 225 would have turned into more than $600,000.
How to Buy into Japan’s Advanced Economic Power
Although China’s economy has now eclipsed Japan’s in size, Japan is still Asia’s most advanced economic power, with world-leading technologies and an unmatched infrastructure.
The cost of doing business in Japan has decreased dramatically in recent years, as well. Land prices, office rents and labor costs have come way down. So have taxes and tariffs. And the government has instituted serious banking reforms.
The nation also sits on a mountain of personal financial assets – more than $100,000 for every man, woman and child. After a decade of negative stock market returns, most of this capital is sitting in low-yielding bank deposits. Even a small fraction of these assets returning to the equity market could give it a serious jolt.
So how do you play a rebound? Consider a Japan ETF or some of the country’s unloved blue chips like Toyota (NYSE: TM), Mitsubishi Financial (NYSE: MTU), Canon (NYSE: CAJ), or NTT DOCOMO (NYSE: DCM).
The healing there will take time, of course. But just as the U.S. stock market rebounded from the recent financial crisis quicker than almost anyone expected, things in Japan may look dramatically different in six to 12 months from now.
Of course, very few people believe that. But, in one sense, that’s a good thing. Negative sentiment and low valuations are the defining characteristics of contrarian investing.
Bottom fishermen, cast your nets.
Good investing,
Alexander Green
2
Why Ignorance Is Bliss In the Stock Market
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Why Ignorance Is Bliss In the Stock Market
by Alexander Green, Investment U’s Chief Investment Strategist
Monday, May 2, 2011: Issue #1503
The other day I was speaking with a friend who’s too nervous to invest in the market.
“I just can’t pull the trigger,” he said. “How can you buy stocks when the Fed is priming the pump, real estate is in a tailspin, the dollar is in the tank, the Euro zone is teetering, the Middle East is a powder keg and Congress – as always – is spending money the way my wife does in Vegas?”
I know just how he feels. After all, like most investment analysts I spend my days marinating in the news cycle. I see all these terrible headlines, often several times a day. It’s hard to turn a blind eye.
But if you want to be a successful investor, you may need to do just that. Let me explain …
The national news backdrop is always unsettling. Americans experienced plenty of good times over the last 80 years, but they were punctuated by recession, depression, inflation, war (including two big ones) and almost limitless scary scenarios.
But, through it all, there’s always been plenty of money made owning the fastest-growing, most-profitable companies in the nation. Everyone knows that the best way to get rich is to own a business making money hand over fist.
Yet if you strike out on your own, you’ll find there are more than a few hurdles. For starters, you need a significant amount of capital to start a business. You have to have a lot of entrepreneurial skill, a talent for dealing with customers, employees, suppliers and regulators. And if you meet these first two requirements, strap yourself in. Because it’s a well-known fact that 85 percent of new businesses fail in the first five years.
Fortunately, you don’t have to have this kind of money or take these kinds of risks to get rich in business. You only need to own shares of companies that are – in the words of my 25-year-old nephew – “killing it.”
I’m talking about companies experiencing double-digit sales growth, sharply higher earnings and fat returns on equity. These companies tend to be innovators, continually launching hot new products and services. (Apple is a prime example.) You’ll find that institutions are taking big positions in these stocks. The companies themselves are often buying back their own shares. And the chart – which shows technical factors like price and volume – generally gets an A+.
It’s called momentum investing. And it works. Just a few weeks ago, for instance, we bought shares of internet security company Fortinet (Nasdaq: FTNT). Last week the company reported a blockbuster quarter. Sales jumped 34 percent. Operating income more than doubled. And the CEO Ken Xie pointed out that the pipeline is full and the company is achieving “significant momentum.”
Our shares jumped over 14 percent in one day. And I see plenty more upside ahead.
Of course, we never would have bought this stock if – instead of looking at the fundamentals of the business – we spent our days worrying about the state of the world.
I’ll let you in on a little secret. As an investor, it’s not your job to envision solutions for the political arena, the world economy, or the financial markets. And that’s a good thing. Because the world is way too big and complicated to figure out anyway.
And it’s not necessary. If you want to make money in the market, forget about the “macro” picture. And focus instead on identifying businesses that are likely to post huge earnings surprises in the weeks and months ahead.
That’s how all the great investors – from Buffett to Templeton to Lynch – did it. And that’s how you can do it, too.
Good investing,
Alexander Green
6
Why You Should Invest in Growth, Not Value
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Why You Should Invest in Growth, Not Value
by Alexander Green, Investment U’s Chief Investment Strategist
Monday, December 6, 2010: Issue #1401
Patrick Henry famously declared that he knew no way of judging the future but by the past.
So if you’re putting together a long-term investment portfolio, it might be wise to look at the historical returns for various types of assets. Not just for the past few years, or for several decades, but for the past couple centuries.
When you do this, you’ll notice something interesting:
- Owning a portfolio of businesses (stocks) has generally been much more rewarding than making loans to corporations or Uncle Sam (bonds) or sticking your money in the bank (cash).
- Look closer at the clear winner (equities) and you’ll also find that value stocks have outperformed growth stocks over the long haul and that small-cap value has beaten large-cap value by a substantial margin.
It therefore follows that an investor seeking maximum capital appreciation might focus on identifying undervalued small-cap stocks.
But there’s only one problem with this: It won’t work for most investors, even if the future is very much like the past. Here’s why…
Beware the Value Investing Trap
Value stocks require something that growth stocks don’t: Patience.
When a stock – either large or small – is in the cellar, it’s there for a reason. Typical ones are that the company is:
- Losing market share…
- Seeing its margins fall…
- Is losing money…
- Or is experiencing flattish sales and declining profits.
As a value investor, you don’t know when these state of affairs will end, but you might be tempted to invest in a company if it’s relatively cheap in relation to sales, earnings or book value (i.e. net worth) in the hope that management will set things right.
The problem is this can take quite a long time. Or it may never happen at all. As the stock gets cheaper and cheaper, you may believe it’s becoming an even better bargain. This is the classic “value trap.” And if you keep buying a stock on the way down, it may very well have your name on it when it hits rock bottom.
Dead Money With Decent Dividends
Even if a value stock is destined to generate a good return over, say, a three- to five-year horizon, most investors won’t be around to enjoy it.
How do I know this? Because as a former money manager, I’ve dealt with thousands of “typical investors.” And regardless of what they say in their initial interview about their willingness to stay the course and think long-term, it all goes out the window for 90% of them when the road gets bumpy. Or if things don’t kick into gear right away.
A client who sits on a stock – or even a stock fund – for six months and doesn’t see a spark will remind you with every conversation that he or she is sitting on “dead money.”
No argument there – they are (at least temporarily). But value stocks often pay decent dividends that help compensate for this. Early in my career, however, I got tired of holding hands and counseling patience and switched from a value to a growth methodology.
It was a good move. If you want action, you should have it…
There’s No Shortage of Excitement with Growth Stocks
Buy the best growth stocks you can find. Given that they tend to be twice as volatile as the market (and twice as expensive), there is generally no shortage of day-to-day excitement.
But if you use a trailing stop, you can generate results that are much better than historical long-term returns (which always assume a buy-and-hold approach) and with less risk because your positions are fully protected.
So unless you have the patience of Job – and most investors don’t – you’re better off owning growth stocks than value stocks and, of course, using a trailing stop.
In my next column, I’ll demonstrate why small-cap growth – historically the worst-performing long-term equity class – is the very best place to find blockbuster stocks.
Good investing,
Alexander Green
8
Why Share Buybacks Are One of the Most Bullish Signals You Can Get
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Why Share Buybacks Are One of the Most Bullish Signals You Can Get
by Alexander Green, Investment U’s Chief Investment Strategist
Monday, November 8, 2010: Issue #1383
For months, U.S. public companies have sat on record piles of cash – more than $1.8 trillion. Now, many are finally putting it to work.
But they’re not hiring more workers, building more factories, or paying down debt. Instead, they’re using the money to buy back their own shares.
So far this year, companies have announced that they’ll purchase more than $273 billion of their own shares. That’s more than five times as much as last year, according to Birinyi Associates.
Some economists argue that this money could be better put to work in job-generating activities that might produce economic growth. However, management’s first obligation is to shareholders, not economists or “the public.”
And if your business outlook is cloudy, you don’t want to commit that cash to building new manufacturing facilities or taking on new employees that aren’t needed.
Regardless of whether you’re an individual or a corporation, sitting on cash isn’t terribly rewarding these days, with the average money market fund paying less than one tenth of one percent.
So buying back shares makes good sense. Why?
The Share Buyback Boost
Because when you divide net income into a smaller number of shares outstanding, you get greater growth in earnings per share. And ultimately, that’s what drives share prices higher.
(If the economy shows more promise down the road, a firm can always do a secondary stock issue to raise capital for expansion.)
A partial list of companies that announced major share buybacks last month includes:
- PPG Industries (NYSE: PPG),
- Cypress Semiconductor (Nasdaq: CY),
- eBay (Nasdaq: EBAY),
- Weight Watchers (NYSE: WTW),
- EMC (NYSE: EMC),
- Coca-Cola (NYSE: KO),
- Walgreen (NYSE: WAG),
- Iron Mountain (NYSE: IRM),
- Family Dollar (NYSE: FDO),
- And Chevron (NYSE: CVX).
In addition…
- Two months ago, Microsoft (Nasdaq: MSFT) borrowed $4.75 billion by issuing new bonds at rock-bottom interest rates and announced that it would use a significant portion to buy back shares.
- In August, Hewlett-Packard (NYSE: HPQ), the world’s biggest maker of personal computers, said it would spend $10 billion buying back its shares.
- A few months earlier, snack-food giant Pepsico (NYSE: PEP) said it would buy back $15 billion in common stock over the next three years.
- Washington Post (NYSE: WPO) authorized executives to buy back as much as 750,000 shares of its Class B shares.
Why Share Buybacks Are Important… And What They Mean for the Market
Many investors recognize the importance of top executives buying back their own companies’ shares with their own money at current market prices (i.e. insider buying).
But they underrate share buybacks because they sometimes don’t do anything more than offset the new shares created by option compensation. (And, indeed, that is occasionally the case.)
But when a company announces a major buyback, it often means the executives and board of directors are betting their jobs that the company’s shares are undervalued.
Why? Because if management spends tens of millions of dollars of the firm’s money buying shares back and the stock is sharply lower in six months or a year, they may well be out of a job.
Yet history shows that share buybacks are generally well-timed. It’s a positive development for shareholders.
And the large number of share buybacks announced this year is yet another reason why the market should keep trending higher.
Good investing,
Alexander Green
18
The Four Investment Risks You Can't Avoid
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The Four Investment Risks You Can’t Avoid
by Alexander Green, Chief Investment Strategist
Monday, October 18, 2010: Issue #1368
We’re making money hand over fist – locking in significant double- and triple-digit gains – in our Oxford Trading Portfolio, Seven Deadly Sins Portfolio, Oxford All-Star Portfolio, Momentum Portfolio, Insider Portfolio and our New Frontier Portfolio.
Yet I still talk to investors every day who tell me they’re completely out of the market. When I ask them why, they always give me some variation of the same answer: They just can’t take the risk.
These investors need to wake up and smell the java. There has never been – and never will be – a time when stocks aren’t volatile and the economic outlook isn’t uncertain.
Yet nothing gives a better return over time than great stocks…
Four Wealth-Building Barriers
What these investors may not realize is that by sitting out the stock market rally, they’re taking four significantly greater risks:
- Purchasing Power Risk
Low inflation isn’t a problem now, but it’s like having a slow leak in your swimming pool. At some point, you’re likely to jump off the diving board and hit concrete.
Even low inflation is slowly draining your purchasing power. You may feel safe sitting in cash, but you’re virtually guaranteeing that inflation will outpace your asset growth. And thanks to our gargantuan budget deficit, we may face sharply higher inflation in the years ahead.
- Interest Rate Risk
Ben Bernanke and Co. took short-term interest rates to near zero. The average money market account now pays a microscopic .05%. (It will take your money more than 1,400 years to double at that rate.)
And if the Fed decides to raise rates by even one point, it will knock 3% off the value of your Treasury bonds, essentially erasing a year’s worth of returns. Bonds are not a great bet right now.
- Timing Risk
Every market timer would like to believe that he or she will be in the market for the rallies and out for the corrections. Never did the phrase “more easily said than done” ring truer.
I still talk to investors every week who are waiting for the market’s “final capitulation.” Final capitulation? The Dow is up 70% from the lows of last March. This is a bull market by any definition. Yes, it will end at some point. But if you didn’t catch the lows last year, what are the odds you’ll pick the top of this bull, which may last for years?
- Shortfall Risk
This is your single greatest investment risk – the possibility that you won’t have enough money to reach your financial goals or support yourself the way you’d like in retirement.
Talk to elderly investors who are counting nickels and the story is virtually always the same. They didn’t save enough and (depending on personality type) they were either too conservative or too aggressive with their money. It’s a sad thing when your golden years are tin-plated and it’s way too late for a do-over.
So what’s the solution?
Think Ahead and Grow Rich
In short, don’t let the perma-bears and the gloom-and-doomers talk you out of achieving your financial goals.
Yes, you should own some gold, some bonds, even some real estate. But if you don’t own stocks, where are you going to generate the returns you need to live the lifestyle you want?
No one can say where the stock market will be 15 days or 15 weeks from now. But think about your retirement. Fifteen years from now, the market will almost certainly be a lot higher.
So stop fretting over the short-term outlook and start putting money to work in great stocks to meet your long-term goals. Financial freedom is about managing investment risk… not avoiding it.
Good investing,
Alexander Green
23
How The Oxford Club Beat The Financial Crisis… And What We See Now
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How The Oxford Club Beat The Financial Crisis… And What We See Now
by Alexander Green, Investment U’s Chief Investment Strategist
Thursday, September 23, 2010: Issue #1351
Investment forecasting is an inherently humbling business.
No matter how many good calls you make, there is always the possibility of getting it wrong the next time. Unexpected events happen. Markets turn on a dime. And an investment advisor often learns – in the cold reality of hindsight – that just when he felt like sticking his chest out he should have been covering his privates instead.
Yet there is a time for celebration too. And there is no denying that The Oxford Club and its members just came through the biggest financial crisis and the nastiest economic downturn in modern history with flying colors.
Perhaps the most surprising part is this: We can’t claim we foresaw how it would all unfold. If we had, we might have told readers to plow their money into bonds before the stock market meltdown and then switch back into stocks at the very bottom.
Unfortunately, there’s only one type of investor who does this consistently. You may have heard of them. They’re called liars.
So how did we succeed when tens of millions of investors stumbled?
Guesswork, Forecasting, Market Timing: Three Things You DON’T Need to Invest Successfully
Our investment system is built on the fundamental premise that to a large extent, the future is unknowable. Seasoned investors agree but then insist, “But of course you have to guess.”
No, you don’t.
We’ve taken the guesswork out of investing. For long-term investors, we use a proprietary asset allocation model, rebalance annually and keep taxes and investment costs to the absolute minimum.
No economic forecasting or market timing required.
Our short-term traders focus on buying great companies that are likely to beat consensus earnings estimates by a wide margin and run trailing stops behind them to protect both their principal and their profits.
How has this worked? You be the judge…
How We Notched a 28% Average Return Amid the Chaos of 2008
2008 was one of the worst years on record for the S&P 500. It posted a return of -38.5%. That caused us to stop out of 45 stocks in our Oxford Trading Portfolio. Here is the entire list. Nothing has been omitted. Although we took some lumps like everyone else that year, the average return on our closed positions was 28.6%.
With the financial crisis unfolding, we set aside our market neutral position. Why? Because you shouldn’t be afraid to aggressively buy or sell when market sentiment and valuations reach extremes. (That means either extreme optimism and sky-high valuations or extreme pessimism and rock-bottom valuations.)
Going into 2009, most investors were scared out of their pants. Stock market players were cashing in their chips. Bank depositors were running down to their local branch to withdraw their savings. The world seemed on the edge of financial collapse. And so did the markets.
Yet the headline on our annual forecast issue was: “Our No. 1 Prediction for 2009: Economic Disaster AND a Soaring Stock Market.”
Bear in mind, almost no one was saying this at the time. But that’s exactly what investors got. While the economic slump only deepened in 2009, the S&P 500 came roaring back – and our recommended stocks outperformed it handily.
If the Market Gives You Lemons… Don’t Get Sour, Just Suck Up Profits
This year we’ve maintained our optimistic stance on equities and have been rewarded with even more big profits.
While the S&P is only up 4% year-to-date, we’ve already realized gains of 229% on La-Z-Boy (NYSE: LZB), 103% on Tiffany & Co. (NYSE: TIF) and 54.7% on Emergency Medical Services (NYSE: EMS).
We’re also sitting on current gains of 321% on the Vanguard Emerging Markets Index (VEIEX), 299% on the Templeton Dragon Fund (NYSE: TDF) and 94% in Discovery Communications (Nasdaq: DISCA).
Yet over the past year and a half, at investment conferences around the world, I’ve heard almost nothing but talk of stagnation, double-dip recession and gallons of gloom and doom.
This week the National Bureau of Economic Research reported that the longest and most severe recession since the Great Depression is over. That doesn’t mean we’re out of the woods yet. We’re likely to have high unemployment and low economic growth for many months – and perhaps the next three years.
But we’re fully prepared for that, too. In fact, we’re already capitalizing on it. Perhaps that’s why the independent Hulbert Financial Digest ranks our Oxford Club Communiqué among the top investment letters in the nation for 10-year performance.
In short, we’ve taken the lemons the market handed out during the financial crisis and turned it into a Tom Collins with a fruit slice and a maraschino cherry.
If this sounds a little brash, I apologize. But we’ve enjoyed enormous success during the toughest economic period in more than 80 years.
And as Dizzy Dean famously said: “It ain’t bragging if you can do it.”
And if you want to do it, too, consider joining The Oxford Club and we’ll show you exactly how in our five model portfolios.
Good investing,
Alexander Green
