investments

Old School Wins

Sat, 22 Nov 2008 05:11:29 PST

What have we learned from the implosion of the credit, mortgage and stock markets?

One thing for certain – the older generation had it right. They were right because the price-to-earnings ratio – an important measure to gauge stocks – really does matter. “Old School” wins.

The PE ratio was scoffed at, shoved aside and analyzed away by analysts and brokers at investment firms over the last bull run. They claimed we were in a “new era” of investing. Don’t you remember all the buy recommendations on stocks with PE ratios of 30, 40, 50 and higher multiples? Stocks like Cisco Systems, GE, Intel and Microsoft were trading at such high multiples not so long ago. Cisco, for example, was trading at $34 a share on Nov. 6, 2007 (it’s now about $18) and in that same year reported diluted net income per share of $1.17. That equates to a PE ratio of nearly 30. The problem was stock prices were bid-up and PE ratios far out-stripped corporate earnings growth rates. Earnings certainly weren’t growing at mid-to-high double digits annually. No big company can do that for an extended period of time. Yet, PE ratios were right up there at 30 and 40 multiples. Analysts came up with a bunch of hyperbole and other “egghead” concepts to recommend stocks garnering such high multiples.

Yet, I was taught and trained to be wary of buying stocks with PE ratios exceeding 20. That’s what some finance teachers espoused – and that’s what I’ve come to believe.

Now we face the credit crunch, a crashing stock market and a looming deep recession. Equities are being re-priced today; the stock market has declined some 35% over the last 12 months. And Americans - and Angelinos, in particular, are feeling the pinch. And with that drop has come the precipitous fall in the price-to-earnings ratio. Now investors are willing to pay a much lower spread above corporate earnings to own stock – i.e. the PE ratio. Those same stocks which sold at 30 and 40 multiples are now trading near 10 to 15 times earnings or less. GE is now at about $14 a share (down from $38 in 2007), and over the last 12 months earned about $2.00 per share. The stock now trades at about seven times earnings. Stocks have gotten comparatively cheap. Many more bargains exist today in the stock market. A stock with a nine multiple seems to be a much better buying opportunity than the same stock trading last year at a 40 multiple of earnings. I don’t think the businesses of GE, Coca -Cola, and Wal-Mart has changed that much over the last five to 10 years. Yet, investors are valuing them radically different – and much lower.

Today, it’s back to basics with stock market investing - the gray-haired finance teachers and old textbooks were right all along - the price-to-earnings ratio is an important valuation tool. It’s a great barometer to use when buying stocks. It’s time-tested too.

From now on I’ll just trust “old school” when buying stocks and not some newly-created analytical Wall Street technique. #

Mr. Lux, formerly an Account Executive with Morgan Stanley, is a graduate of UCLA and holds an MBA in finance and has been involved in real estate lending in the Los Angeles area for over 20 years. He is author of the investment book, Exposing the Wheel Spin on Wall Street. Ted can be reached at: tedlux@ca.rr.com

Joe the Plumber Better Watch His Investments

Tue, 11 Nov 2008 04:08:20 PST

Investors need to own much more these days.

I was wrong when I wrote in my book, Exposing the Wheel Spin on Wall Street, in 2000 that investors needed to own only 8 to 15 stocks to achieve ample diversification. Diversification is the theory of not putting all of your “eggs” in one basket. I was wrong because the average investor (not the Warren Buffett type) has little hope of recognizing and avoiding the corporate crook and his cronies. The “little guy” needs help today.

In recent past, we’ve seen the implosion of Enron and WorldCom. Now that list has grown much longer adding: Bear Stearns, Lehman Brothers, Countrywide, Fannie Mae, Freddie Mac and insurance behemoth AIG. The stocks of these big companies have crumbled and fortunes have been lost. Call it mismanagement, the lack of accountability and Board oversight or greed. Maybe it’s just crooked behavior. Remember that Bernie Ebbers at WorldCom and Ken Lay and Jeffrey Skilling at Enron were prosecuted and convicted. Millions of Americans entrusted their hard-earned capital in the stocks of these “rock-solid” firms and what have they been left with? The answer is virtually nothing! Maybe it’s the “second-coming” and more will be punished now and put away?

The problem is the average investor needs to protect his or her portfolio of stocks with greater diversification – as major corporations fail. Owning just 10 stocks should do the trick – but not now – not with the unveiling of the mortgage meltdown. How is “Joe the Plumber” going to be able to spot the next corporate crook? The next Lehman Brothers?

Joe, the investor, needs more protection today than ever. He needs to own more stocks in a wide array of industries. He needs to buy index funds as well and avoid high-cost mutual funds. Index funds aren’t actively managed or traded and thus after-tax returns are amplified above managed funds. Joe should look at Diamonds or SPDR Trusts – index investments which parallel the returns of the Dow Jones Industrial Average and the S & P 500. Joe can’t jeopardize his future by being overly invested in one particular company or just a few. Not with corporate behavior these days. Not with the greed and the crooks on Wall Street. Corporate America has recently shown many of us it can’t be trusted.

And we need to protect our neighbor – the “little guy.” That’s right “Joe the Plumber.”

Economic Crisis or Opportunity?

Thu, 23 Oct 2008 03:40:42 PST

Not being a wealty person myself, as a former nurse, I have had many for patients over 34 plus some years. Here is a little of what they taught me. First of all, good health is better than any amount of money. One nice man had a turkey farm and was very wealthy. He said do't do what I did. Here I am sick and dying, and those turkeys are so dumb they do themselves in. My experience has been at Thanksgiving. My favorite piece is anything smoked and light. Seriously, the stock market has crashed. Yet, there is a baby boom in the world. So just what products do parents buy for babies? Organic baby food? Yes, it is healthier. People will loose jobs, (there are other ones),and surviving is not just being dependent upon a job. Work must be done well by good workers, if they are to stay employed. In industrial plants, product quality as well as employee safety must be considered. Paper wastes trees and we need them. We need trees in good condition also. Glass is a better product to cook in than something that gives off toxix fumes. Politics aside, to look to leaders as your provider, parent,husband or wife is just plain silly. Leaders must not be corrupt or those they represent suffer. This especially goes for religious leaders too. Is this the end of the World? It could be if we cannot get along. No one wants their children to suffer, or do they? Wise investment persons still exist. Find one or more.Do your best to be the best you can be. People left to their own devices seem to lean to their evil side. Be accountable to someone that is a better person than you.

A Cheap Way to Buy Berkshire Hathaway?

Mon, 20 Oct 2008 10:18:54 PST

Now you know that it's a buyer's stock market - perhaps the best opportunity in a generation. So, the next question is, what shall I buy?

Many recommend an index fund. That is a percentage of an index, like the Standard & Poor's 500 for example, that is well diversified, has very small management fees and low turnover, which results in low tax consequences if you hold it outside of a tax deferred account. All of those are very good things.

Value oriented investors, those who like to buy undervalued companies with long records of solid earnings and management and hold those companies indefinitely, know that renowned value investor Warren Buffett has publicly stated that he is buying US companies now in his personal account, which generally holds US government debt. We know that two of his recent investments are Goldman Sachs (GS) and General Electric (GE). His publicly traded company, Berkshire Hathaway, can be purchased in two ways: one, through BRK.A which is currently trading for $119,800 per class A share; and BRK.B which is currently trading for $3976 per class B (non-voting) share. Admittedly, both stocks are pricey.

Then, there is Wesco Financial (WSC) which is currently trading at $320 per share. While this is still a high priced stock, it's certainly worth a look. Wesco is run by Buffett's Vice Chairman of Berkshire Hathaway, Charlie Munger. It is a property/casualty insurance company, with subsidiary companies in the furniture rental and steel business. Yawn.

What is intriguing about this company is that it is 80.1% owned by Berkshire Hathaway.

On its balance sheet, as of 2007

(In millions)

Cash $531
Premiums due $80
Investments - Bonds $39
Investments - Stocks $1,919

Of its total 3,113 million in assets, over 80% are in cash, bonds and stocks. The components of the portfolio held by the company run by the Vice Chair of Berkshire Hathaway? In its latest annual report, the top holdings were

Proctor & Gamble
Coca Cola
American Express

The largest holdings in Berkshire Hathaway (as of 2007)?

Coca Cola,
American Express
Proctor & Gamble

I am not recommending purchase of this stock, since I don't know you, your risk tolerance, time horizon and investment goals. I am not saying that purchasing Wesco is analogous to purchasing Berkshire.

What I AM saying is that it is worth your time to go to www.edgar.com and research the most recent annual report and subsequent quarterly reports for these companies, and evaluate whether the purchase of Wesco may be a less expensive way to purchase a similar portfolio to that of Berkshire at a more affordable price - for those of you for whom value oriented equity investments are appropriate.

Don't Be a Loser in a Market Panic

Sun, 12 Oct 2008 05:36:03 PST

Yes, you have every right to feel upset about the current state of your investments. You can be very, very angry at the people who allowed a business model built on extreme amounts of debt to collapse without a word from those who were mandated to watch it. You are absolutely justified in all of those feelings.

My purpose is to ensure that your feelings do not result in making decisions that you will regret later. As you watch the "cascading" stock market drift lower and lower, bond yields fall to negative levels (on an inflation adjusted basis), banks you thought were fine being snatched up by bigger rivals at fire sale prices, you may feel that there is no safe place for your money. You may be tempted to cash everything out now. Don't do that.
It's the worst possible action you can take with your long term investments, and will very likely cost you dearly if you do. Here's why.

Inflation will deteriorate your returns

Historic returns on investment

Shares of stock in small US companies - 12.7%
Shares of stock in large US companies - 10.4%
Long term government bonds - 5.4%
US treasury bills - 3.7%
Inflation - 3%

Even if you do as many have done recently and run to treasury bills for safety, you will be losing money. None of these returns are adjusted for the tax that must be paid on the gain on investment when they are sold. On an after-tax basis, adjusted for inflation, you will LOSE spending power in this investment. Guaranteed.

Market timing doesn't work

The reason long term returns are higher in stocks is because you are paid to take risk for higher reward. One type of risk you are assuming for this investment is called "systemic risk." That is the risk that the entire market will go down, taking, of course, your investments with it. That is a real, predictable risk that you take for being in the stock market. There was one in 2001, where the "Internet bubble" burst, in the early 1990's, 1987 and in the mid-1970's. Some are of a short duration; others last for years.
No one has successfully predicted market corrections. Even if it were possible to get out of the market prior to a correction, it would also be necessary to get back in at precisely the time it moved up. You'd have to be right twice, or forego much of the "rebound" that took place when the market recovered.

Let me repeat. NO ONE has successfully predicted market corrections.

Long term investing means just what it says

Jim Cramer, host of "Mad Money" on CNBC, recently advised his listeners to cash out any money they would need in the next five years. What?

The stock market is an appropriate place for long term investing, based on its historic long term returns. "Long term" is definitely over five years. Long term should actually be considered more like ten, fifteen or twenty years. Anyone who invests in the stock market for the short term is a gambler. "Trading" is gambling. It is NOT investing.
Market corrections are predictable in the course of stock market investing. They happen about every decade, as mentioned before. And, every time one happens, you would think the current correction was the first one in history, judging from the behavior of investors. If you're not prepared to withstand a correction, you have no business in the stock market because if you sell during a correction you are guaranteed to lose money.

This is the time when serious investors make serious money
When was the last time you knew that Warren Buffett was buying? When was the last time you knew what he was buying?

Many investors follow the changes in Berkshire Hathaway, Warren Buffett's company, for the slightest indication of what the Oracle of Omaha is buying. Usually the disclosures are made public long after his actual purchases are made. Now, we know he's investing in Goldman Sachs and General Electric. Think about this.

Value investors, Buffett being the most successful of our time, wait for prices of well run companies with predictable earnings and competent management to fall to bargain prices. Buffett began amassing his fortune in the stock market correction in the mid 1970's. During times like these, value investors make the investments that result in extraordinary returns.

The one important question you must answer

It's not necessary to "pick the bottom" of this correction. All you need is the ability to know what is undervalued, and buy it. It takes courage. How do you know whether you are making the right decision?

The one question you must answer in the affirmative is this. Do you think that the US remains the premier financial powerhouse in the world?

If so, this may be the buying opportunity of a lifetime. Don't be one of the people who passes this up, or worse, one who sells.

No one ever made a penny by panicking.

Queen of Wall Street

Wed, 08 Oct 2008 03:24:26 PST

Initially, no one knew how big the banking crisis would be. Now, we know the projected bailout will be in the area of $700 billion. Personally, I can't comprehend that much money in a single transaction. But there was one person who saw this crisis coming and had the nerve to say so.

Bank analyst Meredith Whitney was the first to make the call. I remember watching Meredith a few years back when she was on Fox's Bulls and Bears stock show. Meredith more than held her own with the likes of Toby Smith, Gary B., Pat Dorsey and others. Let's not forget that Meredith met her current husband, WWE wrestling star John "JBL" Layfield, while on the show. Now, Meredith has garnered the type of name recognition usually reserved for celebrity types.

According to Oppenheimer Investments, here is how the events unfolded for Meredith's market call:

She was the first analysts to discuss the impact of subprime loans on banks and that homeowners were in over their heads due to such instruments as interest-only mortgages, etc.;
She predicted that Citigroup would be forced to cut its dividend as Citi management denied this report;
She then forecasted more write-downs at Bank of America, UBS and Lehman Brothers;
She tells her clients to stay away from banks as this will be the biggest financial crisis in history.

Now we know that Whitney was spot-on for each of these market calls. Meredith continues to warn that the relationship between banks and rating agencies during the real estate bubble will have a lasting impact on banks' ability to fully recover.

Meredith should be commended for having the courage to go against Wall Street and make a very difficult call. She was out-on-a-limb that could have cost her job if she was wrong. I don't recall Henry Blogett having this kind of courage in 2000. The banks often refute any negatives calls and try to discredit the analyst involved.

The critics will continue to challenge Meredith's creditability in the near future. But for now, she wears the crown of "Queen of Wall Street."

Types of Investments

Mon, 06 Oct 2008 11:19:21 PST

The basic concept of investing is really rather simple. The idea behind all types of investments is to use the money you already have to make more money down the road. That can mean a long way down the road, such as a twenty-something's retirement, or a short distance down the road, such as a forty-something's retirement plan.

Fittingly, an investment you plan to keep for the long haul is called a long-term investment. Conversely, an investment you plan to get into and out of rather quickly is called a short-term investment.

Okay, so that's the difference between long-term and short-term investing. There are also two basic types of risks associated with the various types of investments: high-risk and low-risk. Some investors also insist that there is a third type deemed moderate-risk, which falls between the two extremes.

Low-risk investments are intended for those conservative investors who are not comfortable with the idea of possibly losing all their money. Low-risk investors are like the turtle as opposed to the hare. They prefer the slow and steady way to increased wealth.

High-risk investors, also called aggressive investors, are more like the hare. They are comfortable with the idea that they can get up and out there. They don't hang back and wait for the tried-but-true methods.

Moderate investors, obviously, fall somewhere between the two extremes of conservative and aggressive investors. They tend to put some of their assets in low-risk ventures, some in high-risk, and some in moderately risky areas.

Low-risk investments are usually the ones that involve depositing cash into a financial institution in exchange for a small amount of accrued interest. Typically, this is the way most people begin their investment lives. The various accounts include the regular old savings account, certificates of deposit, money market accounts, and certificates of deposit. They are very safe, but the amount of interest you earn is lower than the possible return on higher-risk investments.

High-risk types of investments generally carry the opportunity to earn significantly more income; however, you also run the risk of possibly losing your money. The stock market is considered a high-risk type of investment, as is currency trading, futures trading, and some real estate investments. Investing in a brand new company can also be quite risky, but if the business is a huge success, the potential profit can be enormous.

Whether you choose to invest your money for a number of years or only for a few years, the idea of making your money "turn into" even more money is alluring. Whether you are comfortable watching your money grow just a touch at a time or want to see the thrill of a huge profit, there is a financial advisor who can guide you to the best types of investments for you. Generally, the faster you want to see a return, the more risk you will have to take, which is one really big reason it makes sense to start saving for retirement as soon as you get your first "real job."

Eight Different Types of Investments

Mon, 06 Oct 2008 11:11:09 PST

Are you concerned about your financial future? Do you need to put your kids through college a few years down the road? Do you want to retire while you can still do more than rock in a chair? Do you want to ensure your posterity the financial advantages that you lacked while growing up? Do you want to live a reasonably comfortable retirement without a lot of financial worries?

Most people do find themselves in some such situation, and many folks really have no idea how to go about investing their hard-earned money, or even the different types of investments that are available. If your idea of investing involves a piggy-shaped ceramic jar or them underside of a mattress, fear not. You have information about the different types of investments available right at your fingertips.

Stocks: When you buy stock, you buy a piece of the company and any rights that go along with partial ownership. The way to make a profit with stocks is to buy low and sell high or to receive stock dividends. Stocks can be quite risky.
Bonds: When you invest in bonds, you are actually lending money, usually to a government agency. Bonds are much less risky than stocks.
Real Estate: When you invest in real estate, you may be purchasing with the intent to re-sell at a profit, or you may be buying property to use as rental property. Traditionally considered a sound investment, the real estate market is currently a buyers market, so real estate investing is trickier right now.
Foreign Currency: The Forex market is a currency-trading market that is open all the time and accessible via the Internet. With Forex, you trade currency pairs for other currency pairs in the hope that you will trade for currency that has more value.
Mutual Funds: When you invest in mutual funds, you are joining a group of others who are also investing in the mutual fund. Basically, you and the others share the cost of hiring a professional to manage your assets, and most mutual funds include a variety of different investments, such as high-risk, long-term, short-term, stocks, bonds, and the like.
6. Certificates of Deposit: Certificates of Deposit, or CDs, are similar to savings accounts, except they pay better interest. The reason for the higher interest rate is simple: when you open a CD at your local financial institution, you agree to leave the money there for a set amount of time; generally, the shortest amount of time is six months, but you may agree to a term of one year, two years, or even five years. The longer you agree to keep the CD, the higher the interest rate.
Insurance: Some people choose to use life insurance as an investment. Many policies have investment properties, and an insurance agent or financial advisor can help you choose the right one.
Savings Accounts: Savings accounts offer very little return; in fact, although they are technically a form of investment, they barely qualify anymore. They are certainly a very good way to teach your kids the process of saving, however.

Of course there are other different forms of investment, such as investing in a start up company or some other form of business. But as you can see a variety of types of investment can add spice to your financial future.

Don't Gamble Your Retirement Away

Sat, 04 Oct 2008 04:27:00 PST

Today many people are nervous! all their life they have worked to build up their retirement. In our economy we have many many what if's? what do i do? should i keep my money in that mutual fund? should i keep my money in that 401 k? I am a licensed annuity seller. All these questions i mentioned are asked to me almost every day. I dont think that people should have to wander if the money that they worked for all their life will still exist in a failing economy.

My answer to these people is simple... If you have been losing money with your retirement, if you are in the least bit worried about your cd in a certain bank that is failing or failed, or been bought out, then TAKE IT OUT!! Okay, then the next question is I will be penalized right? Of course you will, its the us government... So How can i help them get their losses back you are wandering? I rollover or transfer their money from their retirement to one of my annuity products from an A plus rated company by standard and poors, and the street.com. Example of one case i just rolled over.. This guy calls me up and says, i have lost 30 grand since the beginning of 2008. I meet with him, look over his Mutual Fund account.. All i could do is shake my head.. its true he did lose 30 grand since january of 2008.

So in the month of may 2008, i transferred his money to a Vista index accelerator annuity.. As soon as his money went into the account i put him in(annuity) which was 500 thousand dollars, he was immediately bonused 8%, which comes out to 40 grand.. How much did he lose with the mutual fund? answer- 30 grand.. So already he has made a 10 thousand dollar profit on his money. I am watching his account, by the end of 2008, he will make 60 thousand dollars. That is a total of 560 thousand dollars.. When im dead and gone, and he is dead and gone, his children will still be millionaires. With Annuities, you cannot lose any money, it is no connected to the stock market whatsoever!

He is invested into a private company with an A plus rating by standard and poors, and thestreet.com My company has over 330 billion dollars in its general account(insurance company). People open your eyes, and your retirement statements. The government might have bailed out wall street, but when will it happen again. Annuities are the best thing that ever happened to working men and women!!!

Best Steals of All Time

Thu, 18 Sep 2008 09:17:11 PST

The Nike Swoosh

In June 1971 Carolyn Davidson met Phil Knight one of her accounting teachers. She than began working on a logo for his company then known as Blue Ribbon Sports. She designed what is now known as the Nike swoosh and sold it to the company for a measly $35 dollars. Nike today generates over 16 billion dollars in revenue.

Alaska

On March 30, 1867 the United States government purchased Alaska from the Russians 2 cents an acre for a grand total of 7.2 million dollars. The 656,424 square miles of land has the highest yielding oil field in the United States, and is rich in coal as well.

Mona Lisa

The Mona Lisa painted by Leonardo da Vinci was bought by King Francis I for 4,000 ecus which today in US dollars would be worth around $100,000. Today the estimated value of the painting is around $670,000,000 dollars.