A year ago the S&P 500′s earnings were $84.92.  This year (TTM) they are $51.37.  That is a decrease of 40%.  A year ago, the S&P was trading at 1478 and now it is at 873.  That is a decrease of 41%.  If a company’s earning decrease by 40%, then the stock’s price should decrease by 40% (so long as there haven’t been any changes in the number of shares outstanding).  So according to the decrease in earnings, the S&P is valued correctly. 

The earnings of the S&P are distorted this year.  Six companies (AIG, WB, S, GM, ML, C) had over $170B in losses in the TTM.  Six companies represent about 1% of the 500 companies in the S&P but accounted for 60% of the decrease in earnings.  These six firms lowered the earnings of the S&P by $20/share.  Drop these six from the S&P and the earnings are $71 instead of $51.  And that is only a 16% decrease in earnings since last year.  If earnings were $71 instead of $51, the S&P would theoretically be trading at 1242.  Continue Reading

If you want spectacular gains, like Buffett used to make back in the day, you may be out of luck using Buffett methods.  I believe that back in the day, markets were less efficient and more stocks were incorrectly valued.  Finding stocks that catapult 100′s of percent in value in a year or two is very hard to do.  It is hard to find stocks that will grow 50% in 3 yrs.  And that isn’t even crazy growth.  That was normal 20 yrs ago.  Maybe it is just the last decade which has me pessimistic?  (It’s the only one I’ve invested in though.)

Anyways, if you think you know which way the market is going to move there are ways to boost your returns besides options (and probably less expensive than options).  My friend who trades options (his closest friends know him as “The Horse”) told me that “right now options are selling at a very high premium because we are in a market of never before seen levels of volatility.”  Continue Reading

Recently Warren Buffett spent $8B buying preferred shares of big US companies (GE and GS).  He gets a 10% yield on his shares.  These preferred shares are different than regular shares.  You don’t hear about them very often. Continue Reading

Harvard’s endowment is down 22% in the last 4 months and going to finish the yr down ~ 30%.  It was worth $37B in June and has lost > $8B since then.  The fund has been in the news alot in recent yrs for its stellar performance.  The fund has returned an average annualized return of 13.8% over the last 10 yrs and 17.6% over the last 5 yrs.  In the last 40 yrs, the fund has only had 4 negative yrs, with 3 of those being down less than 3%.  Its worst yr was 1974 when it returned negative 12.2%.  

In years past, they did extremely well due to their real assets and foreign stocks (and heavy emerging market exposure).  But I guess all good things come to an end.  This yr has not been a good one for them.  Since summer their returns are just about equal to those of the S&P 500. 

Their fiscal year goes from July 1 to June 30.  Their holdings as of June 30 2008 were:

• 12% US equities
• 20% foreign equities
• 11% private equities
• 9% bonds
• 17% hedge funds
• 31% real assets (timber land, agricultural land, real estate)

You can read more about the fund here.

If one is trying to pick the best sectors to invest their money in the next 12 months, there are a couple places they could look:

• the most beat up sectors
• the sectors which will grow their profits the most

Continue Reading

The people who know the company the best are the people who work there.  So their actions can give you information you may not otherwise be able to get.  I’m going to discuss what you should look for and where to find it.

1) Insider Trading

The easiest way to tell what bosses think is look at their buys of company stock.  You can find this information on Yahoo Finance by clicking on ‘Insider Transactions’ once you’re on a stock’s main page.  You can also see it on MSN Moneycentral by clicking ‘Insider Trading’.  Both of these pages will show you recent transactions of CEOs and other executives/insiders.

Big purchases are what you want to focus on.  And if they are big purchases at a smaller company, that is even better.  As a rule, you want to find purchases of more than $100,000 in a 3 month period.  For example, if you look at DELL, Mr Dell bought $100,000,000 worth of shares in Sept of this yr.  That’s an impressive buy.

2) CEO Compensation

If the CEO is paid like a king, he is likely to underperform.  That goes contrary to common thinking, but its been proven true.  You can find Executive compensation on Yahoo Finance by clicking on ‘Profile’ once you’re on a stocks main page.  The payroll will be on the bottom right side of the page.

Its hard to tell how much is too much though.  I have heard of a couple of rule-of-thumbs.  The first, is that the CEO shouldn’t make more than the rest of the top 10 on his staff combined.  The reasoning behind this thinking is that one guy cannot run a company on his own.  So if Mr CEO is making $10M and the rest of the top ten on his management team are making $100K each, then something is likely out of whack.  Also, many times in the past, if the CEO was paid a huge sum, it worked out very well in the beginning, but then very badly in the end (Lee Iacocca of Chrysler).  The hypothesis behind this thinking is that his ego will swell as his paycheck swells and he will think himself invincible, conceited and unable to make a bad decision.  You do not want your leader to possess those qualities.

The second rule-of-thumb is that the CEO should be making what other CEOs for similar sized companies make.  Last year, large cap CEOs averaged $12M.  Mid Cap CEOs averaged $6M.  And small Cap CEOs averaged $2M.

Another thing, I don’t think CEOs should make loads of cash during years of underperformance.  Their pay should be commensurate with their performance.  So if the stock or earnings are up 100% in a given fiscal year and the CEO is paid much more than other CEOs, that is probably alright.  But if he is paid $50M in a year in which the stock or earnings are down by 50%, that seems unacceptable.

Also, make sure you lump stock options into the compensation equation.  Many CEO’s stock options account for a larger portion of their compensation than does their normal paycheck.

3) Letters to Shareholders

You should always check out the annual report of a company before buying its stock.  And somewhere in the Annual Report should be the CEO’s letter to shareholders.  This part should include goals and strategies for reaching those goals.  It should be written in a manner that shareholders can understand.

If you want to read great examples of Shareholder Letters, you should check out Berkshire Hathaway’s letters here.  Warren Buffett has great business acumen, sense of humor, and a way of explaining complex things so anyone can understand them.

Turning 30 is a big milestone in your life.  It is kind of a point at which you should change from a guy into a man.  I know you graduate college in your early 20′s, but society allows you some time to go from college graduate to a responsible man.  I think that by the time you turn the big 3-0, society expects you to be grown up. 

I am going to list some things you should have accomplished by the time you turn 30.  Continue Reading

When people first graduate from college/high school, they make a humble salary and find a way to make ends meet.  Maybe they don’t save very much, but they do alright.  Along the way their salary likely doubles, triples, or quadruples.  With their salary increasing by such a huge amount, there ought to be some money left over to be put into savings.  Sadly, that is rarely the case.  Most people spend as much as they can. Continue Reading

Yesterday’s prose was very simplistic and did not take into account many of the variables involved in the home buying process.  Some of them play a big part in the equation and account for large swings in dollar amounts. 

Below is the math which should include all of the variables involved.  My thinking may not be perfect so please comment and let me know what thoughts you have.

I think in the end it is very clear which investment is the better one financially.  But many people like to own their own home.  Can’t do that if you rent your whole life.  And many people would not save the difference between rent and buying so in a way it is a forced savings plan.  And if buying a home can force people to save nearly $1M dollars, then they are likely much better off than if they rented (b/c they wouldn’t have saved that $1M).  If you are disciplined and can save, I think you can do better with your money than the forced saving plan of buying a home. Continue Reading

In Jeremy Siegel’s book, “Stocks For the Long Run”, he finds that real returns of stocks have averaged 7% since 1870.  Real returns are returns after inflation is taken into account.  For example, if inflation is 3% and a stock returns 10% in a given yr, then the real return would be 7% (10% – 3%).  And real returns are the only returns that matter, because they measure an increase in spending power.  If inflation is 3% and a stock returns 3%, then you haven’t improved your position at all.  You can purchase exactly what you could purchase the yr prior.  In conclusion, stocks increase in value 7% per yr because that is how fast companies tend to grow their profits. 

Houses have their own version of profits: rents.  These rents are profits, either realized if someone is paying you to rent the house or implied if you are not paying rent to live there.  House prices and rents have been closely correlated throughout history, both increasing at the rate of inflation or about 3% a yr.  This number is low because it is hard for a house to think up ways to increase its profits.  Robert Shiller, the Yale economist who successfully predicted the stock market crash of 2000 in his book “Irrational Exuberance”, has found that home returns since 1900 would have been zero if not for 2 brief periods in history.  Even if the two periods, one immediately following WWII and the other from 2000 to 2005, are included they would only boost real returns to 1% per annum.  If you’d like to see his data sets, they can be found here: http://www.econ.yale.edu/~shiller/data.htm.  Continue Reading