OMG! In ten days we've gone from a slow growth economy to a possible recession! That frightening word RECESSION is harped continuously through media outlets worldwide. Scaring us!!!
So, okay, let's be precise: A recession is defined as two or more negative gross domestic product growth (GDP) quarters in succession. Gross domestic product growth measures goods and services that the United States sells during specific time frames and is used as an economic barometer for government officials, as well as private sector economists. This is important because the United States currently has varied predictions ranging from one to two percent GDP growth for year 2011, and the mere thought of a negative percentage brings the world to it's knees!! Does this reaction warrant such aggressive fear-mongering?
Last night, Toby, our new feline guest for the week, was in need of various paraphernalia to satisfy his instincts and entertain yours truly. The short trip to Walmart was an enlightening positive boost to the negative evening news headlines. All of the parking lots were full on the one mile strip en route to my destination. That includes some well know restaurants like Carrabba's, Panera and Outback, all with long lines for dinner service. Walmart itself was very busy. Is this what it feels like when approaching a recession? I don't believe so.
Let's not forget that as the United States and Europe struggle under political regimes that favor socialism and unionism, the rest of the developed world (China, India, Brazil) is embracing capitalism and the "right to work" for all citizens. These three countries sport GDP growth rates in excess of six percent! Many of our international companies benefit from this growth. Hello Apple, Microsoft, Intel, Proctor and Gamble, Kimberly Clark, Caterpillar and others.
If we are entering a "double dip recession", so be it! Let's get on with it and work harder to get more freedoms, less regulation, get federal expenditures under control and substantial reform to our welfare system, including medicare and social security! It can all be done easily with some conviction from the top. If that should happen, the incentive to grow, succeed and make a better future for all of us will take hold. (Oh, whoops! Did I say the "welfare" word back there? Sorry, I meant entitlement programs. Let's not upset anyone, shall we?)
How's that for the glass being half full?
(Reminder: Check this blog's archives for other artcles.)
Steve M
Tuesday, August 23, 2011
Lesson 1 The tool box
I think we all have the basic tool box at home. You know, the one with a screwdriver, hammer, and wrench that's stored in the kitchen drawer with all the other important stuff we almost never use. I think my friend calls it Donna's drawer. We call ours Gail's drawer.
The point is, from time to time, we all look for that tool box to maintain items in our household. If we don't take on these periodic maintenance tasks, our household becomes less inviting and begins to lose value. Stock investing requires its own set of tools to evaluate a potential buy (or, position, as it is called ) and to monitor or maintain existing positions (or, portfolios, as they are called ).
The earnings per share of a company is considered the most important statistic to comprehend before investing in a company's stock. Before starting a position in a stock, you need to review current, past and future earnings projections. Earnings are important to you because they tell you the relative profitability of the company. Relative will become the key word when learning how to use tools. Earnings per share is defined as the net income of a company ( after taxes ) divided by the number of outstanding shares of common stock. These two statistics are readily available on Yahoo finance or Edgar on line. Earnings per share measure is important because it's the amount of money left over for shareholders ( you ). Companies then have a choice to distribute that cash in the form of a dividend, or keep the cash in retained earnings, allowing an internal source of capital to support the growth of the company. Both choices have obvious rewards to shareholders.
Now that you know how to arrive at earning per share you can engage the first tool used by investors to evaluate their potential stock picks or review their holdings ( portfolio ). Price to earnings ratio (P/E) is the price of the stock divided by the earnings per share. For instance, a stock price of $ 25.00 divided by earnings per share of $ 1.80 equals a P/E ( price to earnings ratio ) of 13.88. This metric becomes important for multiple reasons. It establishes how the company compares to competitors in the same sector of business. It can also reflect the potential earnings growth over time. If we believe a company will grow 20% + over the next five years, and the price to earnings ratio (sometime referred to as multiple), is only 10, then the growth is not being factored into the stock price. In other words, the stock is undervalued by almost two times.
I wish it were all that simple and we could pick winners and know when to buy and sell a stock. Price earnings multiple is the first of many factors in making a decision. Please feel free to ask me any questions to help understand this metric.
(Reminder: Check this blog's archives for other artcles.)
Until next time,
Steve M
The point is, from time to time, we all look for that tool box to maintain items in our household. If we don't take on these periodic maintenance tasks, our household becomes less inviting and begins to lose value. Stock investing requires its own set of tools to evaluate a potential buy (or, position, as it is called ) and to monitor or maintain existing positions (or, portfolios, as they are called ).
The earnings per share of a company is considered the most important statistic to comprehend before investing in a company's stock. Before starting a position in a stock, you need to review current, past and future earnings projections. Earnings are important to you because they tell you the relative profitability of the company. Relative will become the key word when learning how to use tools. Earnings per share is defined as the net income of a company ( after taxes ) divided by the number of outstanding shares of common stock. These two statistics are readily available on Yahoo finance or Edgar on line. Earnings per share measure is important because it's the amount of money left over for shareholders ( you ). Companies then have a choice to distribute that cash in the form of a dividend, or keep the cash in retained earnings, allowing an internal source of capital to support the growth of the company. Both choices have obvious rewards to shareholders.
Now that you know how to arrive at earning per share you can engage the first tool used by investors to evaluate their potential stock picks or review their holdings ( portfolio ). Price to earnings ratio (P/E) is the price of the stock divided by the earnings per share. For instance, a stock price of $ 25.00 divided by earnings per share of $ 1.80 equals a P/E ( price to earnings ratio ) of 13.88. This metric becomes important for multiple reasons. It establishes how the company compares to competitors in the same sector of business. It can also reflect the potential earnings growth over time. If we believe a company will grow 20% + over the next five years, and the price to earnings ratio (sometime referred to as multiple), is only 10, then the growth is not being factored into the stock price. In other words, the stock is undervalued by almost two times.
I wish it were all that simple and we could pick winners and know when to buy and sell a stock. Price earnings multiple is the first of many factors in making a decision. Please feel free to ask me any questions to help understand this metric.
(Reminder: Check this blog's archives for other artcles.)
Until next time,
Steve M
Friday, August 19, 2011
The Inverse Relationship
It's hard to believe that after four years of business school and ten years of practical experience, the meaning of bond inverse relationship finally dawned on me. I was in my mid thirties. Hopefully, you will not have the comprehension problem that plagued me and will quickly grasp the reasoning behind the "inverse relationship" of fixed assets; i.e., bonds, treasuries and bond funds. As golf is a game of opposites, so it may be said of bonds. We mistakenly think, as purveyed by some financial advisors, that our principal or equity is much safer in bonds as compared to other assets. Perhaps that's true, but you damn well better understand what you're getting involved with before making that commitment. Let me explain.
If you purchase a $1,000.00 ten-year treasury that is yielding 4% you'd think the risk of principal erosion is minimal, or non-existent while you hold the bond. The reality is quite the opposite, or inverse, depending on the current marketplace yields.
For instance, if yields went up to 5% in the first year you owned the bond and you needed to cash it in, the equity or principal would most likely be 20% less than your $1,000.00 investment, or $800.00. This is because the new investor (or buyer) doesn't want to pay face value ($1,000.00) for a bond earning 4% when they can purchase a $1,000.00 bond for today's 5% yield. However, they will pay the lesser amount of $800.00 at 4% yield because if they own it for the full ten year maturity period, they will recoup the actual face value of $1,000.00. The amplitude of the inversion increases with the length of the holding period. If the holding period is short, then yield variations will not have such a great impact.
Does this clear up the meaning of inverse relationship as it relates to bond purchases? Please feel free to question me if it does not.
Now, why am I writing this? Because many of you will be making investment decisions over the coming years and understanding these principles, and also some serious no-nos, are important. Serious no-no number one is NEVER, I mean NEVER invest in a mutual bond fund. Mutual bond funds are relegated by their prospectus which outlines management's intentions (the word bias is commonly used), limitations and structure among other things. Many managers have to trade bonds well before their maturation dates, forcing losses and tax consequences which would be avoided if you held the instrument directly. If you held a bond directly and the yields move unfavorably, no principal would be lost if you held to maturity.
Most bond funds don't have that luxury because they have to liquidate when holders ask for cash back. When interest rates start rising, people liquidate and reallocate their assets which negatively affects the principal or equity of investment shares. So please, there will be times and places for fixed asset allocation such as bonds, but none should be in the land of mutual bond funds.
I''ll be back soon.
(Reminder: Check this blog's archives for other artcles.)
Steve M
If you purchase a $1,000.00 ten-year treasury that is yielding 4% you'd think the risk of principal erosion is minimal, or non-existent while you hold the bond. The reality is quite the opposite, or inverse, depending on the current marketplace yields.
For instance, if yields went up to 5% in the first year you owned the bond and you needed to cash it in, the equity or principal would most likely be 20% less than your $1,000.00 investment, or $800.00. This is because the new investor (or buyer) doesn't want to pay face value ($1,000.00) for a bond earning 4% when they can purchase a $1,000.00 bond for today's 5% yield. However, they will pay the lesser amount of $800.00 at 4% yield because if they own it for the full ten year maturity period, they will recoup the actual face value of $1,000.00. The amplitude of the inversion increases with the length of the holding period. If the holding period is short, then yield variations will not have such a great impact.
Does this clear up the meaning of inverse relationship as it relates to bond purchases? Please feel free to question me if it does not.
Now, why am I writing this? Because many of you will be making investment decisions over the coming years and understanding these principles, and also some serious no-nos, are important. Serious no-no number one is NEVER, I mean NEVER invest in a mutual bond fund. Mutual bond funds are relegated by their prospectus which outlines management's intentions (the word bias is commonly used), limitations and structure among other things. Many managers have to trade bonds well before their maturation dates, forcing losses and tax consequences which would be avoided if you held the instrument directly. If you held a bond directly and the yields move unfavorably, no principal would be lost if you held to maturity.
Most bond funds don't have that luxury because they have to liquidate when holders ask for cash back. When interest rates start rising, people liquidate and reallocate their assets which negatively affects the principal or equity of investment shares. So please, there will be times and places for fixed asset allocation such as bonds, but none should be in the land of mutual bond funds.
I''ll be back soon.
(Reminder: Check this blog's archives for other artcles.)
Steve M
Ignoring the Hype
It's hard to think of the future when so much excitement can be had today. I understand and respect “living for the now” but am compelled to encourage all of you to SAVE some percentage of your earnings beyond 401K’s and Ira’s. In fact, those of you haven’t already, need to start a separate investment account with one of the online brokerage firms. Any of the major ones are acceptable.
As the market crumbles and the media exploits these events in the headline news, the opportunities to create lasting wealth, rewarding you with future income, grows exponentially! In the last three years the markets in general have sold off three times. Each time, those that bought at or near the lows were rewarded significantly. My message is simple. Don’t buy into all the hype. Examine the real facts about certain stocks and not the market as a whole. Below, I have outlined a conservative approach to income and capital gain and presented the actual results since March of 2009.
Stock Bought low 2009 Today’s price Dividend yield
Dow Chemical $7.00 $ 28.00 3.4%
Intel $13.00 $ 20.50 4.3%
Linn Energy $13.00 $ 38.00 7.3%
Kinder Morgan $42.00 $ 69.00 6.5%
Verizon $25.00 $ 35.00 5.6%
Annaly $11.80 $ 18.00 14.2%
Assuming we made equal investments in all these companies, we would have received an average dividend payout/year of 6.86%!! Wow, try to match that anywhere? Now, let’s add the 86% increase in the value of these equities, our capital gain, and we have a total return over three years that exceeds 100%!! Yes we doubled our money in three years! Sound good? Maybe we should all start taking a closer look at what’s real and what’s the headline news.
If you choose to do absolutely nothing, my love and understanding will always be with you. Hope your days ahead treat you well.
(Reminder: Check this blog's archives for other artcles.)
Steve M
As the market crumbles and the media exploits these events in the headline news, the opportunities to create lasting wealth, rewarding you with future income, grows exponentially! In the last three years the markets in general have sold off three times. Each time, those that bought at or near the lows were rewarded significantly. My message is simple. Don’t buy into all the hype. Examine the real facts about certain stocks and not the market as a whole. Below, I have outlined a conservative approach to income and capital gain and presented the actual results since March of 2009.
Stock Bought low 2009 Today’s price Dividend yield
Dow Chemical $7.00 $ 28.00 3.4%
Intel $13.00 $ 20.50 4.3%
Linn Energy $13.00 $ 38.00 7.3%
Kinder Morgan $42.00 $ 69.00 6.5%
Verizon $25.00 $ 35.00 5.6%
Annaly $11.80 $ 18.00 14.2%
Assuming we made equal investments in all these companies, we would have received an average dividend payout/year of 6.86%!! Wow, try to match that anywhere? Now, let’s add the 86% increase in the value of these equities, our capital gain, and we have a total return over three years that exceeds 100%!! Yes we doubled our money in three years! Sound good? Maybe we should all start taking a closer look at what’s real and what’s the headline news.
If you choose to do absolutely nothing, my love and understanding will always be with you. Hope your days ahead treat you well.
(Reminder: Check this blog's archives for other artcles.)
Steve M
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