The Intelligent Investor - Tips #2

The Intelligent Investor: The Definitive Book on Value Investing. A Book of Practical Counsel (Revised Edition)

While continuing my reading, I stumbled on some nuggets of wisdom that I thought I'd share.

1) Past performance does not indicate future success.

2) Be careful with high growth stocks. They have huge growth expectations which they WILL FAIL to meet at some time.

Some quotes from the book/commentary:

"Great expectations lead to great disappointment if they are not met; a failure to meed moderate expectations leads to a much milder reaction. Thus, one of the biggest risks in owning growth stocks is not that their growth will stop, but merely that it will slow down. And in the long run, that is not merely a risk, but a virtual certainty."

...
"Most investors simply buy a fund that has been going up fast, on the assumption that it will keep on going. And why not? Psychologists have shown that humans have an inborn tendency to believe that the long run can be predicted from even a short series of outcomes. What's more, we know from our own experience that some plumbers are far better than others, that some baseball players are much more likely to hit home runs, that our favorite restaurant serves consistently superior food, and that smart kids get consistently good grades. Skill and brains and hard work are recognized, rewarded- and consistently repeated- all around us. So, if a fund beats the market, our intuition tells us to expect it to keep right on outperforming.

Unfortunately, in the financial markets, luck is more important than skill. If a manager happens to be in the right corner of the market at the just the right time, he will look brillant-but all too often, what was hot suddenly goes cold and the manager's IQ seems to shrivel by 50 points."

....

"You can get ripped off easier by a dude with a pen than you can by a dude with a gun. -Bo Diddley"

Link to the book on amazon.com:
The Intelligent Investor: The Definitive Book on Value Investing. A Book of Practical Counsel (Revised Edition)

Sweet Justice? House Votes To Recoup Bonuses

WOAH more big news today as the U.S. House of representatives passed a bill to recoup bonuses paid to AIG. Due to the public outrage that AIG paid $165M in bonuses for certain executives, the Obama administration and Democratic congress moved quickly to do something about it.

The House proposal's hefty tax provision would apply to executives with incomes over $250,000 who work for companies that get at least $5 billion in federal aid. That could include others besides AIG, such as mortgage financing company Fannie Mae.

"The whole idea that they should be rewarded millions of dollars is repugnant to everything that decent people believe in," said Representative Charlie Rangel, the Democratic chairman of the tax-writing Ways and Means Committee.

In a measure of the widespread outrage over bonuses, small crowds of protesters marched in cities across the United States to denounce the idea that AIG employees who helped push the insurer to the brink of collapse should be rewarded for it.

Sound like sweet justice? Not really. If you dig deeper:

1) A lot of firms were forced to take money from the Fed, even though they didn't want it. In fact, some are publicly saying they want to give the money back. Some of these same firms also came clean and did not give their executives ridiculous bonuses. But the Fed wants to have authority to look around their books to see what the companies are doing. Sounds awfully fishy to me. Why would the Fed want its fingers in so many pies?

2) The taxes apply to any family earning over 250k working at a bailed out firm. So if you worked hard in college, maybe even got an MBA and earned a job at a top wall street firm or any other top bailed out company, you've been forced to endure layoffs, endure even longer hours and now significantly less pay to boot. This was meant to punish the greedy executives, not necessarily all the smart hard working wall street kids just following orders and doing their jobs.

Who do you really think this hits harder:
The executive who already made millions the past few years
OR
The dual income middle management family who works hard and makes $251k a year?

I guess we found our scapegoats... everyone at the bailed out firms and guys like Madoff. I guess the people who passed the laws who got us here and the Fed whose balance sheet has increased by TRILLIONS are innocent bystanders.

People Who Live In Glass Houses Should Not Throw Stones

Source: http://news.yahoo.com/s/nm/20090320/bs_nm/us_financial_aig_17

Is a Housing Bottom in Sight?

Wow. Big news today. Bernake is living up to his "Helicopter Ben" nickname by vowing to pump another $1 TRILLION into the U.S economy, partly by buying government bonds for the first time since the 1960's. What does this mean for you and I?

"The Fed’s announcement signals a clear intent to continue to drive mortgage rates lower and we expect them to meet this objective. ... In 2008, the average mortgage rate on the outstanding stock of loans was about 6.50%. So, if the Fed brings 30-yr fixed rate mortgages down to 4.50% and all homeowners are able refi, the aggregate permanent cash flow savings would be on the order of $200 billion per year."David Greenlaw, Morgan Stanley, WSJ Real Time Economics March 18, 2009

This could be really good news in pretty dark times. Combined with data showing some life in new housing starts, this is the first sign of life for a housing bottom. This is why we need to be a contrarian, because in the darkest of times, sometime always seems to pop up that changes everything.

BUT WAIT. Don't go rushing in to buy everything just yet. I did a little more digging. Calculated Risk puts it very succinctly:

"But some readers are confusing a bottom in housing starts with a bottom in pricing. It doesn't works that way! There will be two distinct bottoms for housing:

1) First single-family housing starts and new home sales will bottom

2) Then some time later, prices for existing homes will bottom

Just about every housing bust follows this pattern. The bottom in prices could be a year, or two, or more away. It is way too early to try to call the bottom in prices. House prices will almost certainly fall all year and probably next year too. Prices will continue to fall. Prices are not at the bottom."

OK SO NOW WHAT?

It's tough to say. If I had to guess, I'd say that:

1) We'll at least get a stock market rally for the short term. I think it will be short lived as reality will catch up with optimism, but we gotta start somewhere!

2) You should run, not walk, to see if you can refinance your mortgage near or below 4.5%. There WILL be renewed interest in housing this summer, coinciding with the school year. Hopefully they help out those in jumbo mortgages!

3) The gold trade is still very much in tact. In fact, this bodes VERY badly for my "wait" approach and others are clearly wise to the theory and jumped in and bought gold on the news.

Source: http://www.calculatedriskblog.com/ and WSJ

The Intelligent Investor - Tips #1

The Intelligent Investor: The Definitive Book on Value Investing. A Book of Practical Counsel (Revised Edition)

I just started reading "The Intelligent Investor" by Benjamin Graham. The cover advertises that it's the "definitive book on value investing". Warren Buffet says it's "by far the best book on investing ever written".

I was bored at the airport and bought it and started reading it. So far, it's been good. It's a little confusing on which voice is the author's because my edition has commentary by Jason Zweig, but it definitely has some interesting points or tips which are directly relevant to this blog!

Below are snippets of good quotes/advice that seem very applicable to investing today.

1. Obvious prospects for physical growth in a business do not translate into obvious profits for investors.

2. The experts do not have dependable ways of selecting and concentrating on the most promising companies in the most promising industries.

By the time everyone decides that a given industry is "obviously" the best one to invest in, the prices of its stocks have been bid up so high that its future returns have nowhere to go but down... The people who now claim that the next "sure thing" will be health care, or energy, or real estate, or gold, are no more likely to be right in the end than the hypesters of high tech turned out to be.

Finally, what was most sobering so far was the following comment in a 1949 edition of the book, regarding the high flying airline stocks of its time, which might have been similar to the dot com tech stocks earlier this decade. I find it interesting and ironic that airlines are still a troubled industry today, but at one time, it was "the hot industry".

"Such an investor may for example be a buyer of air-transport stocks be cause he believes their future is even more brillant than the trend the market already reflects... In the year 1970, despite a new high in traffic figures, the airlines sustained a loss of some $200 million for their shareholders... It is commonly accepted today that the cumulative earnings of the airline industry over its entire history have been negative."

Link to the book on amazon.com:
The Intelligent Investor: The Definitive Book on Value Investing. A Book of Practical Counsel (Revised Edition)

Stock Market Turmoil - 03/03/2009

I was watching Fast Money on CNBC tonight and they were talking about the recent turmoil in the markets:
- The Dow falls to lowest since April 1997.
- 52% of Americans are afraid they will lose their jobs.
- 1/3 of Americans are losing sleep due to economic concerns.

The sky is falling! Fear reigns! Time to Buy Low?

While you might interpret this as a "buy low" moment, a Fast Money guest analyst Yamada looked back at the Great Depression and made a great observation that the real wealth destruction did not occur in the crash of 1929... it actually occured in the 3-4 years after the crash.

My thoughts?
I think we're STILL in dangerous investing times... so be careful out there. Cash is still king. "Buy and Hold Forever" is officially dead. This is no ordinary recession.

Two months ago, I said right here that stocks were NOT CHEAP and that it was a sucker rally. I hope you got out while you could. Based on how bad the last quarter was, the estimates I had in that January post might be considered "very optimistic". It appears things are much worse.

Below is a chart on how we compare to three of the last bad bear markets courtesy of Calculated Risk Blog and dshort.com:

By being on television on a weekly basis, President Obama has scared everyone and the entire stock market has plunged. If you follow this blog, you'll note that I like Gold here, but even Gold is getting dragged down as well. But if the fundamentals for Gold are in tact, why the selloff?

I suspect that someone is being forced to sell their gold holdings and we're going to have another major event (bank/corporation failure, another industry asking for money, alt-a mortgage defaults, etc.). It could be anything, but I think this could happen in the next few weeks. Watch the weekly GLD chart, this could be the entry point we've been waiting for!