When I started at Merrill Lynch in 1979, the Dow Jones Industrial Average was around 800 and ten year treasuries paid 14.7%. Whether you bought stocks or bonds, heck, even cash, everybody made money back then. The market hit a new high almost every day and it got so we started to think we were all geniuses.
Starting to seem like old times, doesn't it? Last week, the Dow crossed a bunch of new thresh holds and closed over the 16000 mark. The S&P 500 and the Nasdaq ruffled up their feathers and quickly followed suit. If you've had all your money in the S&P this year, you're up almost 30%. Wow.
"Which is great," I can hear you saying over there in the corner, "if you . . ." and then your voice suddenly disintegrates into a low, incomprehensible mumble as you stare down at your shoelaces.
Turns out some people - all the sane people, in fact - got scared out of their wits when the market collapsed in September of 2008 and we went to bed at night for a long while not sure if we'd have a global economy when we woke up the next morning.
All of us were playing financial defense in 2009 and 2010. Folks sold their stock funds like crazy and put everything all under the mattress (or in a money market fund yielding under 1%, which is the modern day equivalent). A few of you bold ones got tired of waiting and dabbled in some of those "conservative" income funds paying 5 or 6%. You may not have made much money, but at least you didn't lose any more.
Ladies and gentlemen, I see you hiding over there on the sidelines. You've been watching, biding your time - kicking yourself lately that you missed the big year. "Am I too late?" you repeat for the 87th time as the DOW hits yet another new high.
I've got good news. The last couple of years we've just been making up for the time we lost in the secular bear market that started with the tech bubble of 2000 and ended with the greatest washout since 1932. This bull market won't go straight up. They never do. But stocks should average 10-15% through at least the end of the decade.
Here are five reasons to tape to the bathroom mirror so you don't forget the fundamental reasons why investors in stocks will be happy::
1. Real estate moves in elongated, linear cycles. It was over-inflated real estate that got us into that mess in 2008, and after six bad years, it is real estate that will lead the economy out. According to a recent Harvard study, 1.6 million houses need to be built every year for the next 10 years to meet demand. We're not even back to a million.
2. The infrastructure build-out in emerging economies was delayed, not derailed. China is currently experiencing the largest urban migration in the history of mankind and they need more of everything, including power plants and roads and more buildings where people can live and work and the equipment and materials to build those buildings and roads. - Oh, and just in case you didn't notice, Europe did not go out of business as was widely predicted, either.
3. Technology, technology, technology. The competitive landscape is changing at warp speed - faster than a lot of big old, brick and mortar companies can react. But the internet lowers the cost of connection and offers amazing opportunities to anybody who can get their hands on some connectivity, a little financial backing (easier than ever with crowd-funding) and some fresh, passionate ideas. Efficiency and productivity gain from technology and wealth building is the natural and inevitable result of gains in productivity.
4. For the time being, America is in pretty good-shape energy-wise. The jury is out on the environmental impact of fracking (hmm-mm, not my favorite), but we should be net exporters of energy by next year and not have to worry about running out of fossil fuels until at least 2020. Alternative sources are making big strides.
5. Debt worries have been blown way out of proportion. Debt service is half of what it was in 1989 and because of economic growth the deficit is rapidly shrinking. Corporate America has taken full advantage of ridiculously low interest rates, refinanced all their outstanding long-term debt, and borrowed a little extra "just in case." The economy doesn't even have to grow. Earnings will go up just because of lower interest costs. Leverage, used appropriately, can and will make this market sing.
Next post: Let's talk about Amazon and why I own a company that makes no money.
How to make your own investment decisions and live a rich life
Saturday, November 30, 2013
Monday, November 25, 2013
The New Logo and the frameshop on Main
When I saw my most recent post appear on the Facebook newsfeed last week, I decided it was time for a different look. Enough with my face. DIY Stocks is about the market and all it represents: change and patterns, hope and a bright, shining future crammed full of big dreams. My blog needed a logo.
The Cincinnatus Kidd, a local street artist, came to mind immediately. He works anonymously, like Banksy, but with an optimistic, Midwestern twist and he's nuts about our city. The way he uses shape and color reminded me of something wordless I wanted to tell you about investing.
So I messaged him on Facebook.
That's the way things work these days. You don't really have to know somebody to know somebody. You just have to follow them. I told him what I needed and asked if I could afford his services. Five minutes later he replied. "Come on up to the frameshop," he said. "We'll be here until five."
It was Saturday afternoon and we talked while Jake and Jake, co-owners and friends, finished a framing job in the back room, every once in a while one of them ducking out to go up front to help a customer. In addition to the location in Over-the-Rhine, they've opened a second store in Lexington and have plans for Columbus, Indianapolis, and Dayton. Small operations with personalized service, intimately connected with the communities they serve. This is what today's entrepreneurs look like.
I explained that I was mad at the financial services industry and that it was my intent to try to change it single-handedly. They charge way, way, way too much money for mediocre results and I thought if I could walk people through the way I make my decisions, most folks are smart enough to do it themselves, that they'd be better off financially, that it wasn't something to be scared of. It's fun. And I felt so strongly I was going to give everything away for free and hope something catches fire.
One of the Jakes looked me in the eye. "You know I used to charge $3,000 for this kind of work," he said. When I winced he quickly added, "But I'll do it for a $100."
Which was ridiculous and embarrassing, to both of us, I thought. I'm not P&G, but I could certainly pay him more than that. He wouldn't hear of it. Liked my idealism. He said maybe I could help him with his business someday. Two days later he sent me the file you now see at the top of the post, lines that look more like a roller coaster ride than the jagged, escalating peaks I'd imagined, with a building tucked behind to represent lives and communities, all of it balanced on top of a book of shared knowledge. Perfect.
This is how business works these days in the Sharing Economy where we come out and play on the Internet of Everything. There's a new generosity to capitalism, a sense of responsibility that goes beyond shareholders to the kind of world where we all want to live. And everything happens so fast, no excuses, just get it done. One of us gets an idea. Friends help. You don't need to be rich to try out something. Multiply this experiment in connection over and over, by hundreds of thousands of talented, creative, energized, excited people who believe in something, and you get an inkling of where our economy is heading. Millions of us all over the globe.
When we talk about the stock market, that's what I'm investing in and, have no doubt about it, our returns are going to be amazing.
The Cincinnatus Kidd, a local street artist, came to mind immediately. He works anonymously, like Banksy, but with an optimistic, Midwestern twist and he's nuts about our city. The way he uses shape and color reminded me of something wordless I wanted to tell you about investing.
So I messaged him on Facebook.
That's the way things work these days. You don't really have to know somebody to know somebody. You just have to follow them. I told him what I needed and asked if I could afford his services. Five minutes later he replied. "Come on up to the frameshop," he said. "We'll be here until five."
It was Saturday afternoon and we talked while Jake and Jake, co-owners and friends, finished a framing job in the back room, every once in a while one of them ducking out to go up front to help a customer. In addition to the location in Over-the-Rhine, they've opened a second store in Lexington and have plans for Columbus, Indianapolis, and Dayton. Small operations with personalized service, intimately connected with the communities they serve. This is what today's entrepreneurs look like.
I explained that I was mad at the financial services industry and that it was my intent to try to change it single-handedly. They charge way, way, way too much money for mediocre results and I thought if I could walk people through the way I make my decisions, most folks are smart enough to do it themselves, that they'd be better off financially, that it wasn't something to be scared of. It's fun. And I felt so strongly I was going to give everything away for free and hope something catches fire.
One of the Jakes looked me in the eye. "You know I used to charge $3,000 for this kind of work," he said. When I winced he quickly added, "But I'll do it for a $100."
Which was ridiculous and embarrassing, to both of us, I thought. I'm not P&G, but I could certainly pay him more than that. He wouldn't hear of it. Liked my idealism. He said maybe I could help him with his business someday. Two days later he sent me the file you now see at the top of the post, lines that look more like a roller coaster ride than the jagged, escalating peaks I'd imagined, with a building tucked behind to represent lives and communities, all of it balanced on top of a book of shared knowledge. Perfect.
This is how business works these days in the Sharing Economy where we come out and play on the Internet of Everything. There's a new generosity to capitalism, a sense of responsibility that goes beyond shareholders to the kind of world where we all want to live. And everything happens so fast, no excuses, just get it done. One of us gets an idea. Friends help. You don't need to be rich to try out something. Multiply this experiment in connection over and over, by hundreds of thousands of talented, creative, energized, excited people who believe in something, and you get an inkling of where our economy is heading. Millions of us all over the globe.
When we talk about the stock market, that's what I'm investing in and, have no doubt about it, our returns are going to be amazing.
Sunday, November 17, 2013
How to Pick Stocks: Rules #1 & #2
"Your investor's edge is not something you get from Wall Street experts. It's something you already have. You can outperform the experts if you use your edge by investing in companies or industries you already understand." - Peter Lynch
Rule #1: Invest in what you know.
Since I never studied finance, I had to learn on the job. Everything I needed to know about making money in the market came from four key sources: 1. clients who had already gotten rich using stocks, 2. Warren Buffett's annual reports (of course), 3. the editorial page of the Wall Street Journal, and, most importantly, Peter Lynch.
Lynch ran Fidelity's Magellan Fund from 1977 to 1990. When he took it over it had $18 million in assets. By the time he resigned, the fund had grown to more than $14 billion and averaged a 29.2% return, which I'm pretty sure is still the best 20-year return of any mutual fund ever. Even though I never invested in the fund (because as you might remember, I hate, loathe and despise mutual funds) it is an amazing, amazing accomplishment.
One Up On Wall Street, published in 1989, was the first of Lynch's books about his investment philosophy. Slightly dated, it's still the one book I recommend whenever anybody asks me what they should read when they want to learn about common stocks. While the rest of the financial services industry has spent the last three decades concocting specialized terminology that confuses people and makes them feel dumb, weirdo derivatives nobody can understand, Lynch took the opposite approach. He empowered us. He told us we were smart enough and that our own common sense combined with a little research and some patience was all we needed.
Lynch found some of his best ideas when he was out with his family, traveling or talking with friends and associates. As one famous story goes, one day his wife told him how much she liked L'eggs pantyhose, a new product she'd found at the grocery store. After looking into the company's prospects and liking what he saw, Lynch bought the Hanes Company, maker of L'eggs, and his fund investors realized a 30-fold appreciation in Hanes stock.
Investing in what you know and understand is crucial when stocks go through the unavoidable bear markets and short-term disappointments that are part of investing, because of the fundamental truth of Rule #2.
Rule #2: The key to making money in stocks is not to get scared out of them.
I try not to talk stocks with people too much, because - well, it's kind of an elitist thing - and most people aren't really interested. Maybe they have automatic payroll deductions to put in a few mutual funds for retirement. But they don't want to hear about my stock war stories.
However there's one stock I can't help talking about: TJ Maxx. I'm obnoxious about it, holding up check-out lines to ask the employee in the store if they own any. When a woman tells me she bought her scarf at TJ Maxx, I always say, "Thanks. I'm an owner."
It's not quite as good a story as Lynch's 30-fold increase in Hanes, but I first bought the stock May 16, 2000 at $4.39. It closed on Friday at $63.52 - and that doesn't include the dividends I've gotten over the years. Great investment, but it hasn't always been easy. When the global economy almost collapsed in the fall of 2008, the stock plummeted from $18.76 down to $9.58, almost 50% in a couple of months. Rather than panic, I hopped in the car and drove to my nearest T.J.Maxx. After standing in line for ten minutes to check out, I asked the sales person how business was going in the middle of the recession. "It's great," she said. "We're busier than ever," and I went home and bought another 800 shares. No matter what the stock market does American ladies will never permanently quit shopping, especially if they can get a bargain, and nobody does bargains better than TJ Maxx.
When you really, really believe in the companies you own, that's when you make the big money.
Rule #1: Invest in what you know.
Since I never studied finance, I had to learn on the job. Everything I needed to know about making money in the market came from four key sources: 1. clients who had already gotten rich using stocks, 2. Warren Buffett's annual reports (of course), 3. the editorial page of the Wall Street Journal, and, most importantly, Peter Lynch.
Lynch ran Fidelity's Magellan Fund from 1977 to 1990. When he took it over it had $18 million in assets. By the time he resigned, the fund had grown to more than $14 billion and averaged a 29.2% return, which I'm pretty sure is still the best 20-year return of any mutual fund ever. Even though I never invested in the fund (because as you might remember, I hate, loathe and despise mutual funds) it is an amazing, amazing accomplishment.
One Up On Wall Street, published in 1989, was the first of Lynch's books about his investment philosophy. Slightly dated, it's still the one book I recommend whenever anybody asks me what they should read when they want to learn about common stocks. While the rest of the financial services industry has spent the last three decades concocting specialized terminology that confuses people and makes them feel dumb, weirdo derivatives nobody can understand, Lynch took the opposite approach. He empowered us. He told us we were smart enough and that our own common sense combined with a little research and some patience was all we needed.
Lynch found some of his best ideas when he was out with his family, traveling or talking with friends and associates. As one famous story goes, one day his wife told him how much she liked L'eggs pantyhose, a new product she'd found at the grocery store. After looking into the company's prospects and liking what he saw, Lynch bought the Hanes Company, maker of L'eggs, and his fund investors realized a 30-fold appreciation in Hanes stock.
Investing in what you know and understand is crucial when stocks go through the unavoidable bear markets and short-term disappointments that are part of investing, because of the fundamental truth of Rule #2.
Rule #2: The key to making money in stocks is not to get scared out of them.
I try not to talk stocks with people too much, because - well, it's kind of an elitist thing - and most people aren't really interested. Maybe they have automatic payroll deductions to put in a few mutual funds for retirement. But they don't want to hear about my stock war stories.
However there's one stock I can't help talking about: TJ Maxx. I'm obnoxious about it, holding up check-out lines to ask the employee in the store if they own any. When a woman tells me she bought her scarf at TJ Maxx, I always say, "Thanks. I'm an owner."
It's not quite as good a story as Lynch's 30-fold increase in Hanes, but I first bought the stock May 16, 2000 at $4.39. It closed on Friday at $63.52 - and that doesn't include the dividends I've gotten over the years. Great investment, but it hasn't always been easy. When the global economy almost collapsed in the fall of 2008, the stock plummeted from $18.76 down to $9.58, almost 50% in a couple of months. Rather than panic, I hopped in the car and drove to my nearest T.J.Maxx. After standing in line for ten minutes to check out, I asked the sales person how business was going in the middle of the recession. "It's great," she said. "We're busier than ever," and I went home and bought another 800 shares. No matter what the stock market does American ladies will never permanently quit shopping, especially if they can get a bargain, and nobody does bargains better than TJ Maxx.
When you really, really believe in the companies you own, that's when you make the big money.
Thursday, November 14, 2013
Go for Rich
I think everybody should be rich. Every single person on the planet.
But what does that mean? "Rich" It's obviously a relative term and what is rich for Donald Trump is not rich for a bushman in Tanzania is not rich for a single mom in Cincinnati raising two children by herself, trying to avoid eviction. So all we can do is start with one person's definition and hold it up against another life, one at a time.
Let's start with me.
My definition of rich has changed dramatically over the years. For a long time, it was always very vague, but I knew it was more money than I had because no matter how much I earned it wasn't enough. I'd dedicated over two decades of my life to helping people get more money and I was doing that because I believed with all my heart that money could solve our problems and make us safe. More money was the only product I had to sell. In my early forties I was making at least $200,000 or $300,000 a year - maybe more, one year I know I paid over a quarter of a million in taxes - me, little Kathy Holwadel, the medieval history major.
But I never felt rich. Or safe. And it turns out I had some problems that money couldn't solve, not even if I had all of Warren Buffett's and Bill Gates' put together. So I had to quit my job. Because once you stop believing in the product you can't sell it anymore. That was in 2000, when I was forty-four years old.
I've done lots of interesting things since I quit being a financial consultant, but none of them came with a regular paycheck. In 2012, I earned $3,000 - but that was a fluke that I doubt will be repeated. Most years I made about $200 dollars, often not even enough to qualify for the joint income credit on the state return. Needless to say, there has been a significant change in my lifestyle. My husband and I prefer to eat at home. And it turns out dry-cleaning is not a necessity.
But here's the weird thing: I am rich. Everyday. It turns out it doesn't cost as much as I thought it did to be happy, not even close.
And today I can define the word in clear terms, specific and meaningful to me.
Rich means no debt. Not a mortgage, a car payment, or an outstanding balance on a credit card. I am free.
Rich means my time is my own. I set my schedule. If I feel like staying in my pajamas until two o'clock in the afternoon reading books from the library that's what I do.
Rich means nobody can buy me. Money is never a good enough reason for anything I do and I can afford to do things that don't pay me a dime, including this blog.
Rich means the sun in my face, riding my bike, quiet, cloud watching, time to write, talking to interesting people, a walk-able neighborhood, listening to music, real mashed potatoes and homemade pie, reflection, solitude and art.
More importantly, I now know what "rich" doesn't mean to me. It's not a shiny new car or yet another meal out in a lovely restaurant or a five star hotel or jewelry or new boots or the latest smart phone or anything else that I can pay for with mere money. In fact, I told somebody the other day that if they gave me a million dollars in cash, it wouldn't change Michele's and my life one bit. Not a spec. Because there's nothing I want to buy. Isn't that nice? After a while, the brain chemistry changes and consumption doesn't bring pleasure any more. Shopping has turned into a pain in the butt. As a very wise client once told me, "It doesn't matter if the market goes up or down. I'm still going to get up tomorrow morning and eat my half a grapefruit."
Aim high in life. Go for rich. But before you worry about which mutual funds to sell or whether or not to buy Twitter, do yourself a favor. Sit down, get quiet, and figure out very, very specifically what a rich life means to you. Then go for it hard with everything you've got and don't get distracted by other people's definitions - because everybody deserves to be rich.
But what does that mean? "Rich" It's obviously a relative term and what is rich for Donald Trump is not rich for a bushman in Tanzania is not rich for a single mom in Cincinnati raising two children by herself, trying to avoid eviction. So all we can do is start with one person's definition and hold it up against another life, one at a time.
Let's start with me.
My definition of rich has changed dramatically over the years. For a long time, it was always very vague, but I knew it was more money than I had because no matter how much I earned it wasn't enough. I'd dedicated over two decades of my life to helping people get more money and I was doing that because I believed with all my heart that money could solve our problems and make us safe. More money was the only product I had to sell. In my early forties I was making at least $200,000 or $300,000 a year - maybe more, one year I know I paid over a quarter of a million in taxes - me, little Kathy Holwadel, the medieval history major.
But I never felt rich. Or safe. And it turns out I had some problems that money couldn't solve, not even if I had all of Warren Buffett's and Bill Gates' put together. So I had to quit my job. Because once you stop believing in the product you can't sell it anymore. That was in 2000, when I was forty-four years old.
I've done lots of interesting things since I quit being a financial consultant, but none of them came with a regular paycheck. In 2012, I earned $3,000 - but that was a fluke that I doubt will be repeated. Most years I made about $200 dollars, often not even enough to qualify for the joint income credit on the state return. Needless to say, there has been a significant change in my lifestyle. My husband and I prefer to eat at home. And it turns out dry-cleaning is not a necessity.
But here's the weird thing: I am rich. Everyday. It turns out it doesn't cost as much as I thought it did to be happy, not even close.
And today I can define the word in clear terms, specific and meaningful to me.
Rich means no debt. Not a mortgage, a car payment, or an outstanding balance on a credit card. I am free.
Rich means my time is my own. I set my schedule. If I feel like staying in my pajamas until two o'clock in the afternoon reading books from the library that's what I do.
Rich means nobody can buy me. Money is never a good enough reason for anything I do and I can afford to do things that don't pay me a dime, including this blog.
Rich means the sun in my face, riding my bike, quiet, cloud watching, time to write, talking to interesting people, a walk-able neighborhood, listening to music, real mashed potatoes and homemade pie, reflection, solitude and art.
More importantly, I now know what "rich" doesn't mean to me. It's not a shiny new car or yet another meal out in a lovely restaurant or a five star hotel or jewelry or new boots or the latest smart phone or anything else that I can pay for with mere money. In fact, I told somebody the other day that if they gave me a million dollars in cash, it wouldn't change Michele's and my life one bit. Not a spec. Because there's nothing I want to buy. Isn't that nice? After a while, the brain chemistry changes and consumption doesn't bring pleasure any more. Shopping has turned into a pain in the butt. As a very wise client once told me, "It doesn't matter if the market goes up or down. I'm still going to get up tomorrow morning and eat my half a grapefruit."
Aim high in life. Go for rich. But before you worry about which mutual funds to sell or whether or not to buy Twitter, do yourself a favor. Sit down, get quiet, and figure out very, very specifically what a rich life means to you. Then go for it hard with everything you've got and don't get distracted by other people's definitions - because everybody deserves to be rich.
Tuesday, November 12, 2013
Why I Hate, Loathe and Despise Mutual Funds (a never-ending series)
I could write about why I hate mutual funds every day for the rest of my life and , I swear, I would never run out of material. At 58 years of age, and assuming I make it to my 70th birthday, that's only 4,380 posts - Not a big stretch, since the market and investors continue to provide a never-ending supply of new blunders five days a week. I hate mutual funds so much that I started this blog to push back against the dominating trend in the financial services industry over the last forty years, a ludicrous David to their entrenched and very well-compensated Goliath.
Hating mutual funds is not smart. They serve a valuable purpose. Most people don't like to think about their money because it makes them nervous. Besides, I made a very nice living for many years because I like to think about it and was more than happy to do it for my clients. Used appropriately, professionally managed portfolios can be very useful.
Of course I'm hardly alone in my skepticism about funds. The financial media sells a lot of advertising trash-talking problems in this investment class: funds often have high expenses, advisers get paid big bucks for recommending particular funds, money managers can change without warning, etc, etc, etc. But today I'm going to highlight the Number One reason it's so much harder to get rich using mutual funds.
You.
The average mutual fund investor is horrible at deciding which funds to purchase and when to buy and sell them. This is a very consistent, well-documented pattern.
As of October 26, 2012 the S&P 500 had gained more than 14 percent in 2012. Nonetheless, through October 24, investors had yanked more than $101 billion out of stock mutual funds, according to the Investment Company Institute. During the same period, they added more than $272 billion to bond funds.
Why did they do this? They did it because people pick funds based on past performance, regardless of the disclaimer printed in every single mutual prospectus since the beginning of mutual fund history: "Past performance is no indication of future results."
Let's take a look at the number one fund in terms of new cash for the first nine months of 2012: Double Line Total Return Bond Fund (DBLTX). Started in 2011, the manager had a very good record for income investors that year: 9.51%. That's what attracted 16 billion dollars of new money the next year, doubling the size of the fund. Folks were chasing yield in a low interest rate environment and the 9% plus looked darn good. Now this poor guy - who is probably a very decent money manager, mind you - had a terrible problem. He had to invest all this new cash at the worst possible time, when nobody could find any decent bonds to buy and chances for rising interest rates were very high (which is bad for bond owners as prices decline when rates go up).
Sure enough. YTD return for Double Line Total Return Bond Fund in 2013? .09% That's right. Nine-tenths of one percent. And the saddest part of it all? That guy should get a medal for Money Manager of the year. His results came in #10 out of a total universe of 1,079 bond funds. But if investors had left their money in their stock funds they would have netted 24.24% during the same period.
This is what happens when human beings get scared and try to predict the future of a highly complicated global economy. The sky hardly ever falls and they end up disappointed, cursing the vagaries of the market and how the deck is stacked against the small investor, they rant about big institutional investors who get all the shares on the Twitter offering and tell themselves everything stinks.
Sorry. When it comes to mutual fund investing, we have seen the enemy and it is the uninformed, unthinking fear that hides inside us all.
Hating mutual funds is not smart. They serve a valuable purpose. Most people don't like to think about their money because it makes them nervous. Besides, I made a very nice living for many years because I like to think about it and was more than happy to do it for my clients. Used appropriately, professionally managed portfolios can be very useful.
Of course I'm hardly alone in my skepticism about funds. The financial media sells a lot of advertising trash-talking problems in this investment class: funds often have high expenses, advisers get paid big bucks for recommending particular funds, money managers can change without warning, etc, etc, etc. But today I'm going to highlight the Number One reason it's so much harder to get rich using mutual funds.
You.
The average mutual fund investor is horrible at deciding which funds to purchase and when to buy and sell them. This is a very consistent, well-documented pattern.
As of October 26, 2012 the S&P 500 had gained more than 14 percent in 2012. Nonetheless, through October 24, investors had yanked more than $101 billion out of stock mutual funds, according to the Investment Company Institute. During the same period, they added more than $272 billion to bond funds.
Why did they do this? They did it because people pick funds based on past performance, regardless of the disclaimer printed in every single mutual prospectus since the beginning of mutual fund history: "Past performance is no indication of future results."
Let's take a look at the number one fund in terms of new cash for the first nine months of 2012: Double Line Total Return Bond Fund (DBLTX). Started in 2011, the manager had a very good record for income investors that year: 9.51%. That's what attracted 16 billion dollars of new money the next year, doubling the size of the fund. Folks were chasing yield in a low interest rate environment and the 9% plus looked darn good. Now this poor guy - who is probably a very decent money manager, mind you - had a terrible problem. He had to invest all this new cash at the worst possible time, when nobody could find any decent bonds to buy and chances for rising interest rates were very high (which is bad for bond owners as prices decline when rates go up).
Sure enough. YTD return for Double Line Total Return Bond Fund in 2013? .09% That's right. Nine-tenths of one percent. And the saddest part of it all? That guy should get a medal for Money Manager of the year. His results came in #10 out of a total universe of 1,079 bond funds. But if investors had left their money in their stock funds they would have netted 24.24% during the same period.
This is what happens when human beings get scared and try to predict the future of a highly complicated global economy. The sky hardly ever falls and they end up disappointed, cursing the vagaries of the market and how the deck is stacked against the small investor, they rant about big institutional investors who get all the shares on the Twitter offering and tell themselves everything stinks.
Sorry. When it comes to mutual fund investing, we have seen the enemy and it is the uninformed, unthinking fear that hides inside us all.
Saturday, November 9, 2013
Let's Talk Twitter
I'm like everybody else, fascinated by the Twitter offering and trying to decide if I want to buy.
But unlike everybody else, I'm in no rush. My daddy was a stock broker for over 50 years and we talked stocks at our house like other people discuss the weather. When I was 12 I bought Frisch's common stock with my babysitting money and - while it wasn't the best investment I ever made - there was still enough to pay for paneling to finish our basement a couple years later when I asked my parents for my own bedroom. After all my years in the business advising other people about their money (only job I ever had), I've watched the get-rich-quick train circle the block a bunch of times, and there's no need to run if this one pulls out of the station before we can get on board. There's always another hot stock, probably right behind it.
I didn't get any shares on Twitter's Initial Public Offering. That's because I'm a crappy customer. I do my own trades through Merrill Lynch Edge and it's really, really cheap. I didn't even bother to call and ask my brother (a financial consultant with Merrill) to put in an Indication of Interest (IOI). He probably didn't get a single $26 share on the allocation, but if he did he would have given them to his customers who pay the most commissions.
Now let's look at some numbers and see if the stock is worth buying in the open market:
TWTR offering: $26
Opened on the NYSE at $45.10 High for the first day of trading on Thursday: $50.09 (1st hour)
Close on first day: $44.90
Close on Friday: $41.65
So far anybody who bought on the open market is losing money.
HOMEWORK: This is an interactive blog where readers are actually supposed to learn something. Go to any finance site. (Google Finance, Seeking Alpha, and Yahoo Finance are free and reputable. There's also Merrill Lynch Edge, Schwab, Fidelity, Motley Fool, etc, etc, etc) Now feed in the symbol for Facebook (FB). It will give you a chart that shows the last two days of trading which is completely and utterly useless as it is too short a time frame to tell you anything of value. Go to the top of the chart where they offer other time frames and click "all." Since Twitter and Facebook are in the same business, and Facebook's Initial Public Offering was May 18, 2012 - this a valuable map for how a good company trades after the excitement from the offering has died down, that is if everything goes right and it turns out to be a good investment.
FB offering: $38
It traded as high as $45 the first day and closed at $38.23. A week later the stock was at $26.81.
See what I mean? No rush.
I love Facebook. Their platform has changed my life for the better. Other people complain about all the cat videos, but my FB friends are really smart and I get the vast majority of my news about the world from what they share on my news feed. My husband uses Facebook to connect his students at his language school and keep them informed about everything Italian. It's also put him back in touch with lots of friends from his native country. We've even paid for advertising. In other words, I am a believer in the Facebook product and knew I wanted to be a long-term owner, so I established a "starter" position at $32 (300 shares) in the summer of 2012.
As the federal lock-up period ended 6 months after the offering (employees can't sell for the first 6 months and if you check your chart you'll be able to see it) the stock fell below $20 a share. The drop was not surprising as it's perfectly normal for employees to want to diversify and spend a little of their windfall. Since I was still a loyal Facebook user, I bought 1200 more shares around $19 and didn't worry. Turned out to be a good move. They have over a billion monthly active users all over the world, up 18% year over year, and their ad revenue increased 66% in the latest quarter. The stock closed at $47.53 on Friday and I hope to hold it for at least another decade or two. Social networks are empowering individuals in amazing ways and we're just starting to figure out how to use them.
But as to the original question, "Will I buy Twitter?" The stock would have to get really, really cheap to tempt me into the fray. I've got a Twitter account, but I don't use it. Or really understand it. With only 235 million regular users (nothing to sneeze at - it's definitely a valuable asset) - I'd like to see them turn a profit and establish a solid trend before I commit. It's OK if I miss a little of the upside. This is a company that's going to be around for a long, long time. But before I establish a position I better believe enough to add more if it drops. -- And I don't yet. Not even close.
.
But unlike everybody else, I'm in no rush. My daddy was a stock broker for over 50 years and we talked stocks at our house like other people discuss the weather. When I was 12 I bought Frisch's common stock with my babysitting money and - while it wasn't the best investment I ever made - there was still enough to pay for paneling to finish our basement a couple years later when I asked my parents for my own bedroom. After all my years in the business advising other people about their money (only job I ever had), I've watched the get-rich-quick train circle the block a bunch of times, and there's no need to run if this one pulls out of the station before we can get on board. There's always another hot stock, probably right behind it.
I didn't get any shares on Twitter's Initial Public Offering. That's because I'm a crappy customer. I do my own trades through Merrill Lynch Edge and it's really, really cheap. I didn't even bother to call and ask my brother (a financial consultant with Merrill) to put in an Indication of Interest (IOI). He probably didn't get a single $26 share on the allocation, but if he did he would have given them to his customers who pay the most commissions.
Now let's look at some numbers and see if the stock is worth buying in the open market:
TWTR offering: $26
Opened on the NYSE at $45.10 High for the first day of trading on Thursday: $50.09 (1st hour)
Close on first day: $44.90
Close on Friday: $41.65
So far anybody who bought on the open market is losing money.
HOMEWORK: This is an interactive blog where readers are actually supposed to learn something. Go to any finance site. (Google Finance, Seeking Alpha, and Yahoo Finance are free and reputable. There's also Merrill Lynch Edge, Schwab, Fidelity, Motley Fool, etc, etc, etc) Now feed in the symbol for Facebook (FB). It will give you a chart that shows the last two days of trading which is completely and utterly useless as it is too short a time frame to tell you anything of value. Go to the top of the chart where they offer other time frames and click "all." Since Twitter and Facebook are in the same business, and Facebook's Initial Public Offering was May 18, 2012 - this a valuable map for how a good company trades after the excitement from the offering has died down, that is if everything goes right and it turns out to be a good investment.
FB offering: $38
It traded as high as $45 the first day and closed at $38.23. A week later the stock was at $26.81.
See what I mean? No rush.
I love Facebook. Their platform has changed my life for the better. Other people complain about all the cat videos, but my FB friends are really smart and I get the vast majority of my news about the world from what they share on my news feed. My husband uses Facebook to connect his students at his language school and keep them informed about everything Italian. It's also put him back in touch with lots of friends from his native country. We've even paid for advertising. In other words, I am a believer in the Facebook product and knew I wanted to be a long-term owner, so I established a "starter" position at $32 (300 shares) in the summer of 2012.
As the federal lock-up period ended 6 months after the offering (employees can't sell for the first 6 months and if you check your chart you'll be able to see it) the stock fell below $20 a share. The drop was not surprising as it's perfectly normal for employees to want to diversify and spend a little of their windfall. Since I was still a loyal Facebook user, I bought 1200 more shares around $19 and didn't worry. Turned out to be a good move. They have over a billion monthly active users all over the world, up 18% year over year, and their ad revenue increased 66% in the latest quarter. The stock closed at $47.53 on Friday and I hope to hold it for at least another decade or two. Social networks are empowering individuals in amazing ways and we're just starting to figure out how to use them.
But as to the original question, "Will I buy Twitter?" The stock would have to get really, really cheap to tempt me into the fray. I've got a Twitter account, but I don't use it. Or really understand it. With only 235 million regular users (nothing to sneeze at - it's definitely a valuable asset) - I'd like to see them turn a profit and establish a solid trend before I commit. It's OK if I miss a little of the upside. This is a company that's going to be around for a long, long time. But before I establish a position I better believe enough to add more if it drops. -- And I don't yet. Not even close.
.
Wednesday, November 6, 2013
Free Advice from a Medieval History Major
When Merrill Lynch hired me as a financial consultant in 1979, investors made their own decisions, kept stock certificates in a safety deposit box and had no idea how much they were worth. They bought local companies like P&G and 5th/3rd and never thought of selling them because a company had a weak quarter. Investors were owners, not traders. And that's the way they got rich. Since I was a medieval history major in college and had never taken a finance or accounting class, those early clients were my teachers. Based on their common-sense examples, I "retired" in 2000 at the peak of the bull market when I was 44.
For a long time after I left the business, I didn't want to think about stocks. There was a great big world to explore. But when the market crashed in September of 2008 and my husband and I watched our accounts decline by 40% almost overnight, I was terrified like everybody else. My adviser had positioned a bunch of stuff I didn't understand, companies I'd never heard of and a lot of mutual funds. It might be OK to delegate investment decisions when the market is treading water, but if it crashes (and it does that on a regular basis) you darn well better know what you own and why you own it. If you don't you're going to do something stupid.
Two years ago I ran into a former client at an event. "Kathy Holwadel," he said. "I used to have a financial consultant by that name." In all those years he'd never found another adviser he liked and asked for a recommendation. But I couldn't think of anybody who managed individual common stocks like I did, so I offered to teach him how to do it himself. First results were not promising with my students (my husband tagged along for the ride) watching every market move and getting nervous at all the wrong times. But I'm happy to report old dogs are perfectly capable of learning how to buy and sell stocks. Both Christopher and Michele now understand what they own, are doing trades commission-free, and beating the market.
I believe the average individual is smart enough to make their own investment decisions. I believe my former industry has drained every last ounce of soul out of the investment process while making obscene amounts of money for themselves. It's been to their benefit to over-complicate decisions that should be more about common sense than head-and-shoulders tops. Investing is fun. It's about psychology, our society, big, fundamental changes in the world. More than anything it's about hope and believing in something. But if you stick your money in a mutual fund and go play golf you miss everything that's wonderful about it.
So I've decided to write a blog in plain vanilla English that anybody can understand, post at least a couple of times a week about my thoughts on the market, what I look for in a good, long-term investment, as well as a little bit of my philosophy of life. And I'm going to give it away for free. If you've ever wanted to learn more about investing, I hope you'll subscribe to DIY Stocks and invite your friends to do the same.
Investors unite! It's time to take back our portfolios. We are smart enough.
For a long time after I left the business, I didn't want to think about stocks. There was a great big world to explore. But when the market crashed in September of 2008 and my husband and I watched our accounts decline by 40% almost overnight, I was terrified like everybody else. My adviser had positioned a bunch of stuff I didn't understand, companies I'd never heard of and a lot of mutual funds. It might be OK to delegate investment decisions when the market is treading water, but if it crashes (and it does that on a regular basis) you darn well better know what you own and why you own it. If you don't you're going to do something stupid.
Two years ago I ran into a former client at an event. "Kathy Holwadel," he said. "I used to have a financial consultant by that name." In all those years he'd never found another adviser he liked and asked for a recommendation. But I couldn't think of anybody who managed individual common stocks like I did, so I offered to teach him how to do it himself. First results were not promising with my students (my husband tagged along for the ride) watching every market move and getting nervous at all the wrong times. But I'm happy to report old dogs are perfectly capable of learning how to buy and sell stocks. Both Christopher and Michele now understand what they own, are doing trades commission-free, and beating the market.
I believe the average individual is smart enough to make their own investment decisions. I believe my former industry has drained every last ounce of soul out of the investment process while making obscene amounts of money for themselves. It's been to their benefit to over-complicate decisions that should be more about common sense than head-and-shoulders tops. Investing is fun. It's about psychology, our society, big, fundamental changes in the world. More than anything it's about hope and believing in something. But if you stick your money in a mutual fund and go play golf you miss everything that's wonderful about it.
So I've decided to write a blog in plain vanilla English that anybody can understand, post at least a couple of times a week about my thoughts on the market, what I look for in a good, long-term investment, as well as a little bit of my philosophy of life. And I'm going to give it away for free. If you've ever wanted to learn more about investing, I hope you'll subscribe to DIY Stocks and invite your friends to do the same.
Investors unite! It's time to take back our portfolios. We are smart enough.
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