Tuesday, December 22, 2009

Investing Term Tuesday - Gift Of Equity.

Since this is the gift-giving season, I thought it appropriate to share the Gift Of Equity in this investing term Tuesday.

The Gift Of Equity refers to the sale of a home to a family member at a price below the current market value. Sometimes it can be a sale to someone the with whom seller has had a relationship previously.

The actual gift of equity stems from the difference between the sale price and the market value - that's the equity, and it's being given to the buyer.

It's perfectly legal and most lenders simply count the equity as part of a down payment on the home. It does require documentation however, in the form of a gift of equity letter that must be signed by both the seller and the buyer.

There may also be tax consequences and it could affect the asset's cost basis for the home buyer and carry capital gains implication for the seller so be sure to research those aspects if you are considering giving the gift of equity this holiday season. ;-)

Monday, December 21, 2009

Mutual Fund Monday: Morningstar Nominees for Fund Managers of the Year.

Morningstar has released it's finalists for Funds Managers of the Year. Here are the highlights.

Fixed-Income Manager of the Year

  • Phil Condon and Rebecca Flinn, DWS Strategic High Yield Tax Free (SHYTX)

  • Farnham, Kane, Landmann, Nucci*, Metropolitan West High Yield Bond (MWHYX)

  • Dan Fuss, Kathleen Gaffney, Matthew Eagan, Elaine Stokes*, Loomis Sayles Bond (LSBRX)

  • Jeffrey Gundlach and Philip Barach*, TCW Total Return Bond (TGLMX)

  • Mark Notkin, Fidelity Capital & Income (FAGIX)

Domestic-Stock Manager of the Year

  • Bruce Berkowitz, Fairholme (FAIRX)

  • Staley Cates and Mason Hawkins*, Longleaf Partners (LLPFX)

  • Jeff Cardon, Wasatch Small Cap Growth (WAAEX)

  • Dennis Delafield and Vincent Sellecchia, Delafield Fund (DEFIX)

  • Bill Nygren*, Oakmark Select (OAKLX) and Oakmark (OAKMX)

International-Stock Manager of the Year

  • Hakan Castegren and Northern Cross Team*, Harbor International (HAINX)

  • David Herro*, Oakmark International (OAKIX) and Oakmark International Small Cap (OAKEX)

  • Lee, Grace, Bepler, Denning, Lovelace, Kawaja*, American Funds EuroPacific Growth (AEPGX)

  • Brent Lynn, Janus Overseas (JAOSX)

  • Magiera, Tommasi, Coons, Andreach, Donlon, Gambill, Herrmann, Lester, Trotter, Manning & Napier World Opportunities (EXWAX)

* = Past winner.

Winners will be announced January 5th, 2010.

Read the full story and get a glimpse into why each manager is being considered here.

Friday, December 18, 2009

Ivy League Investing For The Common Man.

David Swensen has managed the Yale University endowment from 1984 to 2008 and during that time, the endowment returned an annualized 16.6% - 5 points better than the S&P 500 and a generic balanced portfolio of 60% in a stock index, and 40% in bond index. That equates to a 40 times a grow in wealth with 1/3 of the volatility.Ivy League Investing for the common man_Bingham Hall_Yale University

Not too shabby.

That's the rosy part of the picture though, since 2008 was a devastating year for just about all kinds of investments. From June 2007 to June 2008, the endowment is down an estimated 25-35%. But hey, no body's perfect. And that's still a hair better than the broader market. Besides, even when 2008 is factored into the equation, the Yale endowment returned an annualized 14%.

Here's how you can create your own Ivy League endowment fund with a 10% allocation in each of these ETFs.

iPath S&P GSCI Total Return Index ETN (GSP)

GSP is linked to the GSCI (Goldman Sachs S&P GSCI Commodity Index) Total Return Index and provides exposure to unleveraged commodities. The GSP index is production-weighted, reflecting the relative significance of each commodity to the world economy. Crude oil is currently the dominant commodity in this nondiversified index.

iShares Barclays TIPS Bond (TIP)

The iShares Barclays TIPS Bond ETF seeks results that correspond generally to the Barclays Capital U.S. Treasury Inflation Protected Securities (TIPS) Index (Series-L). This fund invests at least 90% of the assets in TIPS and at least 95% if the assets in U.S. government bonds. The remainder of assets can be in U.S. government bonds not included in the underlying index.

PowerShares DB Commodity Index Tracking (DBC)

The DBC ETF tracks changes in the level of the Deutsche Bank Liquid Commodity index. This fund investments in a portfolio of exchange-traded futures on the commodities comprising the Deutsche Bank Liquid Commodity index. The index commodities include: Heating Oil, light, Sweet Crude Oil (WTI), Natural Gas, Brent Crude, RBOB Gasoline, Gold, Silver, Aluminum, Zinc, Copper Grade A, Corn, Wheat, Soybeans, and Sugar.

SPDR Dow Jones Intl Real Estate (RWX)

The RWX seeks to replicate the Dow Jones Global ex-US Select Real Estate Securities index. The index is a float adjusted market cap index designed to measure the performance of publicly traded real estate securities in countries excluding the U.S..

Vanguard Emerging Markets Stock ETF (VWO)

Like the name suggests, this ETF tracks the performance of the MSCI Emerging Markets index. The VWO is a passively managed investment fund which invests all or most of its assets in a representative sample of the common stocks included in the MSCI Emerging Markets index. The index currently includes around 781 common stocks.

Vanguard FTSE All-World ex-US ETF (VEU)

The VEU fund tracks the FTSE All-World ex-US Index. The index is a free-float-adjusted, market cap weighting of nearly 2,200 stocks of companies located in 46 countries.

Vanguard REIT Index ETF (VNQ)

This fund invests in U.S. based real estate investment trusts (REITs) and is perfect for income and moderate long-term capital appreciation. The fund typically invests 98% of its assets in REITs and tracks the Morgan Stanley Capital International (MSCI) US REIT Index.

Vanguard Small Cap ETF (VB)

The VB ETF tracks the MSCI US Small Cap 1750 benchmark index that measures the investment return of small cap stocks. It's a passively managed, broadly diversified fund of smaller U.S. companies' stock.

Vanguard Total Bond Market ETF (BND)

As the name suggests, the BND ETF invests the majority of its assets (no less than 80%) in bonds held in a broad, market-weighted bond index. The fund maintains a dollar-weighted average maturity consistent with that of the index, ranging between 5 and 10 years.

Vanguard Total Stock Market ETF (VTI)

Vanguard's VTI fund tracks the MSCI US Broad Market index. It's passively managed and invests in 1,200-1,300 of the stocks in the MSCI US Broad Market index. It is often used as a proxy for "owning the entire U.S. Stock market."

Tuesday, December 15, 2009

Investing Term Tuesday: Gold Fix.

The Gold Fix is the act whereby the price of gold is set, twice daily, by the 5 members of the London gold pool. This price is used as a benchmark for most of the global gold products and derivatives pricing.

This "fixing" of the gold price by the London gold pool is based on the ubiquitous economic principle of supply and demand. The gold fix is performed in the U.S. dollar, British Pound sterling and the Euro. It is done at 10.30am and 3pm, London time.

The first meeting of the London gold pool was on September 12th, 1919 at 11:00am. And the meetings have occurred ever since with the exception of the period between 1939 and 1954, when world war II led governments to control the price and the gold market was closed.

The historic high price of gold was reached on January 21st, 1980 when gold hit $850 per ounce. That number was not reached again until January 3rd, 2008 however, when index for inflation the 1980 is $2398.21 in 2007 dollars, so the 1980 record still stands as the historic high price of gold in real terms.

Monday, December 14, 2009

Mutual Fund Monday - 5 Things To Watch When Choosing A Fund.

Picking a mutual fund can be a daunting task, but here are 5 things to look for that I hope will help make the process a little easier. This is part of my weekly Mutual Fund Monday post feature. If you find this interesting or helpful, please read more.

1. Fees.

Over the entire time you own a mutual fund, fees can sap returns without you even knowing it. Fees are also the single easiest thing for an investor to control. You can't always choose the hottest performing fund, but you can choose the one with the lowest fees. Also, many fund companies don't tie fees to performance, so your fund manager gets the same financial incentive whether he beats his benchmark or falls short.

Look for low cost index funds, or fund families like Vanguard, Dodge & Cox and American funds. Also, look for families that tie compensation to performance like Vanguard, Fidelity, Bridgeway and Janus.

2. Size.

Fees matter, and so does size when it comes to mutual funds. When a fund gets too large, the manager cannot buy and sell many assets without affecting the price of those assets by his actions. This makes it very difficult to perform well. Think of it as the difference between steering an 18-wheeler and a motorcycle. You want a fund that's small enough to be nimble and not have to fight against its own momentum.

Look for fund families that don't let their funds grow too big. Funds that aren't afraid to close the doors to new investors when the fund reaches a certain asset size. Families like Dodge & Cox, Longleaf Partners fit into this category. Also watch out for funds that announce they will be closing well in advance as this often signifies that the management is looking to make a last minute asset grab, and does not have the best interest of the shareholders in mind.

3. Age.

Pay attention not only to how old the fund is, but also how old other funds form the same family are. For example, avoid companies that seem to launch funds targeting "what's hot" at a given time - think tech stocks in 1999, or emerging markets in 2006.

Look for fund companies with a long history of concentrating on fundamentals and not simply trying to capitalize on fads. Companies like Longleaf, FPA, and Dodge & Cox fit this metric.

4. Taxes.

Some managers simply don't care about your tax bill, and that's fine if you hold those funds in a tax sheltered account like a 401(k) or IRA. But if it's in a taxable account, it's an unnecessary drag on your return.

Look for funds with low turn over rate, and a small difference between before and after tax returns.

5. Benchmark.

Lastly, you should pay attention to the benchmark of a fund. You'll want to know what the fund is using as its benchmark as well as how it performs in relation to that benchmark. But most importantly, you should look at the absolute return on the money invested. For example, if the fund lost only 35% when its benchmark lost 38%, it's really not getting you much, is it?

Look for how the fund performs is good markets and bad markets. Be sure you can handle that worst case scenario because you can rest assured that it will happen to you at some point in your investing life. Try and find funds that capture most of the upside of the market, while limiting the downside as much as possible. For example, a large cap stock fund that returns 75% of the S&P 500 during a bull market, and loses as much as 50% compared to the S&P 500 during a bear market would get you a smoother ride and potentially larger return, provided you are holding the fund through both periods.

Friday, December 11, 2009

4 Reasons Cash Is King For The Individual Investor.

We've all heard that Cash is King when analyzing company balance sheets. This is especially true in times of recession, since companies without a cash cushion are less likely to be able to survive trying times. But cash is king for the individual investor as well. Here's why.

1. Lower costs.

Not only will you be able to invest larger sums at a time, and thus incur lower transaction fees (as a percentage of your overall investing sum), but you'll likely get preferential treatment too. Face it - financial planners and brokers are people too, and they're going to treat an investor with $100,000 to invest differently than the average Joe with $10,000 to invest.

2. More flexibility with stocks.

Along with the lower fees you'll pay per investment, the more cash you have on hand, the more you can spread out your investments and buy into the market as is declines. This allows you to spread the risk of buying low and selling lower around, thus increasing your likelihood of a decent return.

3. More bond options.

If you're an investor with less than $100,000 looking to invest in bonds, you're limited to bond funds. But once you have over $100,000 you can buy bonds directly. The reason is that to be properly diversified in bonds, you should invest at least $25,000 into each category of bonds - Treasury, municipal, corporate and high yield. The benefit is that you get a guarantee of the face value of the bond when it matures. This isn't the case with bond funds, since manager are often forced to sell their holdings to meet the demand of people selling the shares of the fund.

4. Peace of mind.

Let's face it - you'll sleep better at night having enough cash on hand to meet whatever emergency or unexpected expense life throws your way. It's impossible to put a price on this benefit of cash. Just be sure you don't keep it in the mattress or buried in the back yard. Keep it in CD's or money market funds, to keep ahead of inflation.

Thursday, December 10, 2009

Will Your 401K Match Return?

What will it look like if it does?

If you're like many workers still lucky enough to have a job during this recession, you've probably seen your employer cut or eliminate the contribution match on your 401k plan. Mine did.

My company match on 401k contributions was the first thing cut, just after my bonus and any hope of a raise. That didn't stop me from contributing though. In fact, I increased my contribution rate to offset the loss of company match, and I am convinced that it is a large part of why my 401k balance recovered so quickly from the crash of 2008.

Regardless of how you may have handled the loss of your company match, it looks like the match may be making a comeback in 2010....

According to this SmartMoney article:
companies are increasingly reinstating this beloved perk. In the next six months, 35% of firms that snipped away at their matching programs are planning to bulk them up again, according to a recent Watson Wyatt survey. That’s up from 24% two months ago.

That's the good news.

The not so good news is that it likely won't look like it did before the economic melt down. 13% of employers surveyed said they are planning to reinstate the match at a lower level than previous. Others are changing the criteria for matches, by making them based on company performance. Still others are changing different rules.

17% of the companies bringing back the 401k match say they will be basing it on corporate profits. This will make retirement saving variable and harder to anticipate, especially if you work for a large corporation and have little impact on the company profits.

Other companies are switching to a once per year, lump sum contribution. This change would essentially eliminate the dollar cost averaging aspect of the company match, and if most companies elect to contribute at the same time of year, say the first or second pay period of the new year, then you may even be buying high when your contribution is put to work at a time when millions of other dollars are also streaming into the market.

Some employers also said they are considering a vesting period for the lump sum contribution. This means you could earn your 401k match for two years straight, but if you find another job before the 3rd year (assuming a 3 year vesting period)you could be out your entire contribution altogether.

If enough employers make these kinds of changes, it may be the eventual death of the 401k, since without the company match it pales in comparison to an IRA.

Wednesday, December 9, 2009

Rate Your 401(k) Plan With BrightScope.

Have you ever wished there was a rating system for 401(k) plans?

BrightScope 401k_logo5I've had a reason to in the past. I was looking at two job offers recently and one of the things that set the two apart was the benefit package. Obviously, a big part of any benefit package is the retirement plan offered by the employer. I could see that both plans offered the same employer match level on contributions, but I had no idea what types of investments were offered by the plans, or what the fees were like. That's where BrightScope comes in.

BrightScope is an independent 401(k) rating and analytics firm that quantitatively rates 401k plans from all 50 states in the U.S. and gives plan sponsors, advisors, and participants tools to make their plans better.

They rely on public documents and grade 401k plans based on administrative costs, company generosity, investment options, participation rate, salary deferrals and account balances.

Rate Your 401(k) Plan With BrightScope_resultsIt provides a very nice visual indication of how your company 401k rates, on a scale of 1 (horrible) to 100 (excellent).

BrightScope does not accept compensation in the form of revenue sharing from mutual fund companies or plan providers, so they don't have a horse in the race and they are more likely to provide independent results.

They hope to have over 30,000 plans rated by the end of this year, but if your plan is not yet rated, your plan administrator can get your retirement plan rated for free - no matter how small your company is.

So far so good.

But there are some things I'm not so crazy about.

Rate Your 401(k) Plan With BrightScope_ratingsFor example, the ratings consider things like employee participation rate. I'm not sure why this is important, after all it's not a determinant of how your 401k will perform. I suppose the thinking is that more people participate in better plans than poorer plans. That may be true, but it may also be that the people participating don't have much choice, or the financial knowledge to open an IRA on their own.

Still, that's a relatively minor problem with the idea. The site is very well done and it's free, so why not take a look and see how your company 401(k) plan rates!

Tuesday, December 8, 2009

3 Healthcare Stocks That Could Survive Healthcare Reform.

There's a lot of uncertainty in the air over policies being proposed in Washington D.C. these days, and one of those policies with huge potential to affect business (and hence stocks) is the so called Health Care reform bill.

While it's impossible to say for sure what the exact effect of a government take over of the health care industry would be, SmartMoney suggests that these 3 stocks are at least worth considering since they are more dependent upon larger health care trends than what Washington decides.

McKesson Corporation (MCK)

McKesson Corporation provides supply, information, and care management products and services for the healthcare industry. The corporation encompasses two divisions - Distribution Solutions and Technology Solutions. The Distribution segment distributes proprietary drugs, surgical supplies and equipment, and health and beauty care products to North America as well as providing consulting and outsourcing services for biotech and pharmaceutical manufacturers.

The Technology Solutions segment provides software solutions for clinical, patient care, financial, supply chain, and strategic management. It also provides software for pharmacy automation for hospitals as well as clinical auditing, and compliance management software.

McKesson is headquartered in San Francisco, but serves home care providers, physicians, hospitals, and retail pharmacies in North America, the U. K. and other European countries, and Asia.

Teva Pharmaceutical Industries (TEVA)

Headquartered in Israel, Teva Pharmaceutical Industries develops and produces generic and branded pharmaceuticals, active pharmaceutical ingredients and biogenerics worldwide. R&D efforts are focused on therapies for diseases like multiple sclerosis, cancer, Parkinson's and autoimmune diseases. Teva's product list includes Copaxone and Azilect for treating MS and Parkinson's disease. Through its acquisition of Barr Pharmaceuticals Inc., Teva added pharmaceutical products for women's health to its list.

Rehabcare Group Inc. (RHB)

RehabCare Group is headquartered in Missouri and provides rehabilitation program management for hospitals, outpatient facilities and skilled nursing facilities in the United States. These program management services are specialized for rehabilitation from strokes, orthopedic conditions, and head injuries,cancer, heart failure, burns, and wounds. Rehabcare Group owns and operates five long-term acute care hospitals and six rehabilitation hospitals.

These stocks provide a nice diversification into the medical supply side, pharmaceuticals and long term care. Each of these healthcare segments is poised to experience signifiant growth as boomers continue to age.

Monday, December 7, 2009

Mutual Fund Monday: The Biggest Lies Mutual Fund Companies Tell.

Chuck Jaffe at MarketWatch has a great piece that I thought I'd share for my (semi) weekly Mutual Fund Monday post this week.

His article lists 7 ways that fund companies manipulate their stats to trick investors. It's all quite legal, since much of it depends on your the viewpoint and perspective applied to the facts and figures. For example, how far back do those "past performance" figures go? A fund may look great only because it has an explosive couple of years at the beginning of the period, and has been lack luster since.

Anyway, here's a list of the ways but Chuck does a good job of explaining each in greater detail in the original article.

  1. Past performance, Part I

  2. Past performance, Part II

  3. Past performance, Part III

  4. Average Cost

  5. Returns aren't adjusted for taxes

  6. Time-weighted performance measurement

  7. Manager tenure

You will have noticed, no doubt, that the 1st three items on the list have a common theme. That's because even though most investors know that "past performance is no guarantee of future results", it's still the single characteristic that carries the most weight with investors. Mutual fund companies know that, and they use it. A lot.

Here's Chuck Jaffe, in his own words.

Friday, December 4, 2009

Best Buy's Moat is Eroding?

Best Buy (BBY) should be a slam dunk buy right now, right? When you consider that many of their competitors, like Circuit City, have been sent to bankruptcy when the economy tanked, their strong brand identity and Geek Squad service you'd think they'd be sitting in the center of pretty big economic moat. But that may not be the case any more.

As this article from Morningstar shows, there may be more dark clouds than silver linings on the horizon for Best Buy.

4 threats to Best Buy's economic moat.

Here is a brief outline of the 4 threats as presented in the article. If you find any of this interesting, I suggest that you read the full article.

The Looming Threat of Competition

As mentioned previously, one would think that competition wouldn't be a threat with the demise of Circuit City, but as the article explains, the constant technological innovation and rapid product commoditization means that the defining differential between products is price. Furthermore, consumers have more brand loyalty than channel or store loyalty. All this means that consumers are free to shop around for the best deal on their preferred brand of consumer electronic. This has led to the emergence of new competition from the likes of Wal-Mart, Target, Costco and Amazon; retailers not often thought of as electronics stores.

Potential Shift in Electronics Distribution

In response to the dwindling channel loyalty, Morningstar sees an increase in manufacturer retail channels, like that of Apple. By having their own retail outlet, consumer electronics manufacturers can showcase their products without competition, which should in turn lead to greater brand loyalty. Moves like this essentially cut out the middle men, like Best Buy.

Threat of Digital Distribution

Best Buy has formed a partnership with digital distribution providers in the hopes of capitalizing on the digital delivery trend, but the folks at Morningstar are not sold that this will be enough to compete with established players like Netflix and Apple iTunes.

Services Provide Advantage but Can Be Replicated

Although Best Buy's Geek Squad is a good brand, consumer electronics are more and more commoditized, making customers less loyal and less concerned with servicing. Once a consumer electronic becomes cheap enough, it's easier and more cost effective to buy a replacement than pay to have it serviced.


Don't Be Fooled by Short-Term Improvements

Morningstar sees Best Buy as having much to recommend it for the short term, but sees those benefits diminishing as time progresses. But, much is unknown owing to the ever evolving nature of technology, so it is perhaps best to keep on eye on Best Buy. Also, stay abreast of possible silver linings like Best Buy's international growth prospects and its partnership with Carphone Warehouse.

Wednesday, December 2, 2009

Diversification Is A Scam, Really?

I came across a quote by Jim Rogers in SmartMoney magazine yesterday that almost made me blow my chocolate milk out my nose when I read it. In this interview, Mr Rogers says:
"Diversification is something that stock brokers came up with to protect themselves, so they wouldn't get sued. Henry Ford never diversified, Bill Gates didn't diversify. The way to get rich is to put your eggs in one basket, but watch that basket very carefully. And make sure you have the right basket. You can go broke diversifying. Ask anyone who's diversified in the last three years. They've lost money."

I couldn't believe that SmartMoney printed this quote without clarifying the dangerous implication therein.

Specifically, that more people have lost more money by not diversifying. Just ask yourself, who is engaging in the riskier behavior: The individual investor who's put most of his money into 5 stocks, or the one who's invested his money in 5 broad-based mutual funds? Both investors have full time careers that are not related to finance and take up too much of their time to allow them to become stock picking pros.

Clearly, there is a higher likelihood that the investor who's chosen 5 stocks will lose more of his money that the investor who'd diversified.

The problem with all of this is that Jim Rogers is right.

Bill Gates and Henry Ford are bad examples, because the basket that they put all their money in was their business, and we're talking about investing not being an entrepreneur.

But if you substitute someone like Warren Buffet in place of Gates, then you have a solid point. Warren Buffet does not diversify. He's famous for concentrating his assets into relatively few holdings. But here's where the analogy or the process breaks down - Warren Buffet knows what he's doing. Warren Buffet makes investing his life. Warren Buffett knows how to fairly value a company and its stock, and he knows how to profit on the difference between the fair market value of a company and the current market value of its stock. Most individual investors are nowhere near Warren Buffet's level of business and investing acumen. Many don't even want to put the kind of effort in that is required to reach his level of expertise. And that's fine - provided they don't think they can still invest like him.

And that brings us full circle to the problem of SmartMoney not calling Jim Rogers on his quote.
The way to get rich is to put your eggs in one basket, but watch that basket very carefully. And make sure you have the right basket.

Most individual investors simply don't know how to "make sure" they have the right basket over the long term.

I'm sure Rogers said it to get noticed, generate some buzz about himself and garner scandalous attention. That's fine. But where is SmartMoney, or Business Week? Both publications interviewed him and neither felt the need to comment on his statement about diversification.

It's a shame really, because the quote is only part of a much larger interview at BusinessWeek. I recommend reading the entire interview because he has some very interesting points to make about commodities and the Chinese and US economies.

I just wish the magazines would have provided some cautionary counterpoint to the controversial diversification quote.

Tuesday, December 1, 2009

Memo to Baby Boomers: You're Past Your Peak.

It's nothing personal, and it isn't me saying it. According to a research paper titled “The Age of Reason: Financial Decisions over the Life-Cycle with Implications for Regulation,” by behavioral economist David Laibson:
"prevalence of dementia among Americans “explodes” after age 60, doubling every five years. By age 85, more than 30% have dementia. For Americans between the ages of 80 and 89, roughly half have dementia or a diagnosis of “cognitive impairment without dementia.”"

Well, that's depressing.

I wonder if anyone has told Warren Buffet he's senile and suffers from cognitive impairment?

Laibson being an academic, he proposes heavy regulation and government oversight to ensure that "older people" can't harm themselves financially. But the article does have some practical advice:
The point: While we all think we’re going to be fine, we all should prepare for the worst.

Prepare for your inevitable mental decline by keeping your investment portfolio simple. The more effort required on your part to keep your finances in order and balanced, the greater the likelihood of a single mistake cascading through your financial life and costing you plenty.

Read the full article here.