This book by Stein & Demuth is a great read on conservative investing for those near retirement.
I totally enjoyed its concise description to make market principles easier to understand.Here's a few pearls for my future memory:70% of stock gains are from the dividends!
Buy when there is blood in the streets!
As Buffett has said, "Be fearful when others are greedy, and greedy when others are fearful."Be on the hunt for above average dividends!
The Yield = Payout / Share PriceRisk:If you buy a bond (an I-Owe-You, or IOU) the rate paid to a more current bond buyer could fall, making your bond more valuable.
Interest Rate Risk: If you buy a bond and the rates of payout RISE, yours is worth less (if you had to sell it). So interest rates and bond returns USUALLY are on a teeter totter.
Bond trading then is guessing that rates will fall, and your bond will be worth More.Fidelity has a listing of a bonds last sale price.
Credit Risk: the risk the issuer of the bond could default, highest in junk bonds and some low rated corporate bonds. The best ground is a portfolio or a mutual fund of individual bonds.
Sector Risk: The risk a portfolio of bonds all in the same sector could suffer a demise together.
Marketability Risk/Liquidity Risk: the risk of resale, which is least in Treasury bonds. Its the difference between owning 1000 house you would have to resell, or owning part of a fund which owns houses which is more easily traded.
Callable Bonds: Meaning the issuer of the bond can recall the bond and "refinance" if rates drop, right when you'd like to have the interest you invested for.
Reinvestment risk: Means bond returns rise and your money is tied up, the opportunity costs of other investments during your bond maturity period.Event Risk: the corporation goes under.
Lehman Brothers Aggregate Bond Index: the gold standard to beat by other bond issuers, like the S&P 500 index for Stocks. This was 7.1% for the 21st Century. Use AGG or VBMFX.
Best Ways to Avoid Risks above: DIVERSIFICATION, LADDERS, TREASURY bonds
Bond Ladders:You can spread your bond rates by creating a ladder over years so that a five year ladder would mature 20% of your investment every five years. The same can be done for annuities but takes more shopping and effort on part of the buyer.
TIPS:Treasury Inflation Protected Securities:Deflation is hardest on corporate bonds to repay, because companies have a harder time paying you back. Deflation makes Treasury Bonds the investment of Choice, the government can always print more money to pay you back.
Short term interest rates correspond to Fed. When long-term loan rates are cheaper than short term bonds beware of a pending recession!
INVESTMENT OPTIONSUltra Short Bonds: 90-180 days, will give you 1% above a money market fund return usually.
Money Market Funds: try bankrate.com or ibcdata.com. Returns were 1-2.5% in 2004.
Corporate Money Market Funds: 1.5-2.5% returns but most not FDIC insured. Ford, GE, & Caterpillar are four large corporate finance divisions that do this. "GMAC bank" is the only FDIC insured fund here.
Short Term Bonds: 2 years, 2-3% return, 5 year ladders you can set up yourself at treasurydirect.gov and no charge or expense.
TIPS: These have no Purchasing Power Risk! Immune from Inflation! But their return is reduced by the expected inflation the Fed decides it anticepates at the outset, and so overall returns are reduced by this. Best during Inflation when stocks tank, because the TIPS still go up. Also good in deflation because the rate of return is locked in. These are best in tax-deferred IRA's or you'll pay tax on the phantom income the Fed calculates from inflation! Some Good TIPS Bond Funds are = VSGBX, VIPSX, or try TIP, ACITX, FINPX, TCICX.
Corporate TIPS can be cash flow friendly as they payout every 2 weeks, adjust by their CPI every payday, and have shorter maturity at 5,7,or 10 years, shorter than government TIPS (pay every 6 months, adjust for inflation at the end).I-Bonds: these bonds are not taxed until redemption, but they are not practical so do not use them.
Municipal bonds (Munis) High Grade buy for taxable accounts (federal and maybe county or state tax free)3-6% return, risk that congress might repeal their tax exemption.National munis diversify away local risks. (FSTFX, VMLTX, FLJMX, USATX, VWITX)
Mutual Funds Closed Funds: Shares issued only once, trade anytime market is open, same manager may have many similar funds, trades high initially, then discounted usually a few months later. Do not compound dividends.ETF's: low management fees, trade very close to underlying securities value, closed funds but hybridized. Morningstar.com is useful to find open end funds information and stats easily. Closed end funds require digging to find their stats, yields, leverage, P:E, but try on ETFconnect.com & cefa.com. Most are closed-end Muni bonds.Higher Yielding Bonds: have more Tabasco (can give spicy returns or can burn)
Foreign Bonds: Sovereign Risk means their government can fail to repay you.Currency Risk: Means their currency can fall relative to the dollar, and the worth is less.
Currency Risk is the Joker in the Deck in Foreign Bonds Trading. If you think the dollar is going to get weaker then buy more foreign bonds now, but the dollar is already weak relative to the Euro, but ?
Chinese currency may get stronger in the future?
Hedged Foreign Bonds means their returns are lower but equivalent to US dollar payout, and US Bonds trade almost the same anyway. Unhedged foreign bonds can have much higher returns.
UK, Can, Aus, New Z, Japan are some friendlier foreign bonds. If the dollar slides, these bonds act like a play on the dollar b/c their value is stable relative to that. Consider RPIBX, CIFIX, FCO, yields are 3-6% and 1-2% expense. FCO is a large global income fund, uses alot of leverage to raise the yield.
Carry Trade: means to borrow at short maturity, repay at long maturity, and make money on the difference in rates. This will magnify gains or losses much quicker either way!
For aggressive fixed income investing, the monthly price volatility should be acceptable for the increased returns as long as higher yields remain constant. Time diversification occurs with largely leveraged funds because in high yield environments many sources of high yields abound and in low yield environments the higher rates leveraged can improve quality of life and pays you more when you need it more.
Closed-end municipal bond funds can go on margin to buy tax free securities but you legally cannot borrow money to buy tax free bonds. Compare NUV vs NMD for leveraged vs unleveraged example from 1990-2003.Emerging Market Bonds: Uruguay, Nigeria, Bulgaria.10-25% yields with extreme volatility, repayment risk.
Open: FNMIX, PREMXClosed: GHI, MSD, EDF, EFL, LBF, TEI 7-10%
Leveraged Municipal Bond Funds:Too much risk for the long-term yield return.
Bond returns rise when interest rates fall. Now the rates are so low and bond returns are low, so there is not much room for bond returns to be affected from a rate reduction.
Overall, avoid Bonds in a low interest rate environment.
Junk bonds are bad and municipal junk bonds are toxic. :)
Stocks for IncomeStock yields since 1918 are 6%, but now are 2% for the S&P 500 (in 2004).
C-corp dividends are taxed twice, so companies buy back their stock and hold dividends in order to increase the "relative" payout to shareholders.
Taxes on dividends decreased under Bush from 39% as income to 15% as a capital gains.
Now that dividends are taxed at the same rate as capital gains, companies may increae their dividends.
Some good open end dividend stocks: VWINX (4%), BERIX (5%), HIEFX (2%)
Closed end stocks did better here: DVY (3%), BDV (6%), BDT (6%).BDV buys the 60-80 highest dividends
BDT buys the small and mid cap dividends on the BDV list.Stein-Demuth Strategy: put 20% of your portfolio into dividend bearing stocks, and half of that in DVY
Pick the remaining half as different sector dividend stocks, perhaps a dozen.
Tuesday, March 24, 2009
Rule Makers, Rule Breakers
The Motley Fool's
Rule Breakers, Rule Makers
by David and Tom Gardner,
1999 Simon & Schuster
A great read by the Fool.com founders and sellers of investment advice! This is their 3rd investment book and one meant to differentiate rare investment opportunities from their by-the-numbers approach in their other books.
RULE BREAKERS
David begins the first half the book explaining how to find Prince Hal (who became King Henry V in Shakespeare's Henry the Vth). Prince Hal was a drinking and chumming renegade who broke the rules but later used his daring to become King and then made the rules, much like today's struggle of smaller corporations trying to unseat corporate behemoths who got there by reinventing the business game. It's a perpetual struggle in business evolution to produce efficiency and productivity for all of us. 'Got to love capitalism.
Rule Breakers are unusual birds, but can be 100-baggers in your portfolio if you find them. Buying and keeping one in your lifetime will be enough to beautify your portfolio through retirement!
1) They are top dog and 1st mover in a new and important emerging industry
2) They have sustainable advantages through business momentum, patents, visionaries, or inept competitors
3) past price appreciation equivalent to relative strength performance of 90 or greater
4) smart management and good backing (see Doerr in Silicon valley)
5) branding done well (strong consumer attraction, profits off them, habituates them, protect its business, positive tone, accepts all, great character and internal attractiveness/authenticity).
6) writers will at least once claim the stock is grossly overvalued in media (trade higher than normal Price:Earnings ratios from the get go)
More on Branding:
--Authenticity is Key
--Remind the public your positivity, openness, habituates them to your use automatically--Leadership counts now, improving internal management validates external claims--mindshare is the belief or opinion of using you that you're establishing
--being in the publics eye is a long-term affair, you can waste and outspend now and crash if business model is not productive now (budget carefully and efficiently for marketing)--speed = convenience = repetitive use
--the winner makes someone feel better, have a positive attitude, outlook--habituating means frequent use, every day (Coke = 'always')
--Pavlovs law: habituating means addressing your logo/theme/name with positive images they want to associate themselves with as well (Bud = cool river, mountains, party, people, attractive)
--tolerance means everyone is welcome, non-exclusive is key, openness (Coke = 'buy the world a coke')
My brand: quality, authenticity, technology care, efficient and smart, safe and reliable
--tie to economic engine (cataract experts, enhance eye ctr, or enhance optical ctr, etc)
--'Your world, your Vision."
"See your World Today".
"Clearly Your World".
"Eyecare & Surgery".
"Helping You see Your world". Show lots of people with happy good vision (old, middle, Yups).
"The biggest risk is not taking enough risk."
RULE MAKERS
A developing Rule Maker:
1. systematically absorb all the competition
2. patience: they want the lead and authority down the stretch, put up with short term flames
3. consistent improvement in finance and outlook, >1 $billion in sales, improving cash, gross margins, net margins and less debt
4. an absolute commitment to convenience
5. probably being sued by smaller competition
Best Stocks
1. repeat purchase products frequently (razors, Coke, food, jeans)
2. high gross margin (profit / cost of good > 60% or better)
3. net margin (profit / distribution and sales costs) 20% or better
4. sales growth 10% yearly or better
5. Cash: debt Ratio > 1.5X
6. Foolish Cash Flow (lower is better) < .6, no higher than 1, and 1.5 is very bad = (assets - cash) / Liabilities {debts owed out accumulate with more market power}
7. 2 points if you use the product, know it well,
0-2 points for any above, > 14 points is a winner.also: no new shares outstanding (<1% yearly is good)also: future possibilities, ~ is market cap likely to double, triple in outlook, economy and your opinion of importance of emerging market? can this group stay on top?
See Goog, KO, PEP, KFT, K, MRK, XOM.
In review, By category, Rule Makers:
A. Rule-Making Message (0-1 per item)
1. Familiarity
2. Openness
3. Optimism
4. Legitimacy
5. Inevitability
6. Solitariness
7. Humor
B. Rule Making Location (0-2 points per item)
1. Mass-market repeated purchasing
2. Gross margins
3. Net Margins
4. Sales growth
5. Cash-to-debt ratio
6. Foolish Flow Ratio
7. Your familiarity and interest (or what you see in public's use nearby)
C. Rule-Making Direction (0-3 points per item)
1. Rising gross margins2. Rising net margins
3. Share buybacks
4. Cash outgrowing debt
5. Lowering Foolish Flow Ratio
6. Expanding possibilities
D. Rule-Making Authority (0-4 points per item)
1. Gross-margin lead
2. Net margin lead
3. Cash-to-debt lead
4. Foolish Flow Ratio Superiority
5. Name-brand through convenience
E. Your Pure Enjoyment (0-1 point)
1. Yes or noTotal Score Analysis
Use Rule-Breaker analysis for under 1 Billion benchmark in sales, and giant companies with this Rule-Maker analysis.
Top Tier 50-60 points: keep em for a decade.
2nd Tier 40-49 points: solid companies, need to tell which direction they will be heading by market competition, emergence of industry, can be some of your greatest investments if headed toward the throne.
3rd Tier: debt, low margins, little cash, doomed for mediocrity or worse, ignore them.
4rth Tier: sell.
This individual investor stock approach with awareness to Rule-Breaker-Tweener-RuleMaker status will beat any mutual fund! If the mutual funds even came close they would absorb you in fees. For $200 you can start up 10 to 20 stocks and let them go for as many years as they appear to be growing.
Rule Breakers, Rule Makers
by David and Tom Gardner,
1999 Simon & Schuster
A great read by the Fool.com founders and sellers of investment advice! This is their 3rd investment book and one meant to differentiate rare investment opportunities from their by-the-numbers approach in their other books.
RULE BREAKERS
David begins the first half the book explaining how to find Prince Hal (who became King Henry V in Shakespeare's Henry the Vth). Prince Hal was a drinking and chumming renegade who broke the rules but later used his daring to become King and then made the rules, much like today's struggle of smaller corporations trying to unseat corporate behemoths who got there by reinventing the business game. It's a perpetual struggle in business evolution to produce efficiency and productivity for all of us. 'Got to love capitalism.
Rule Breakers are unusual birds, but can be 100-baggers in your portfolio if you find them. Buying and keeping one in your lifetime will be enough to beautify your portfolio through retirement!
1) They are top dog and 1st mover in a new and important emerging industry
2) They have sustainable advantages through business momentum, patents, visionaries, or inept competitors
3) past price appreciation equivalent to relative strength performance of 90 or greater
4) smart management and good backing (see Doerr in Silicon valley)
5) branding done well (strong consumer attraction, profits off them, habituates them, protect its business, positive tone, accepts all, great character and internal attractiveness/authenticity).
6) writers will at least once claim the stock is grossly overvalued in media (trade higher than normal Price:Earnings ratios from the get go)
More on Branding:
--Authenticity is Key
--Remind the public your positivity, openness, habituates them to your use automatically--Leadership counts now, improving internal management validates external claims--mindshare is the belief or opinion of using you that you're establishing
--being in the publics eye is a long-term affair, you can waste and outspend now and crash if business model is not productive now (budget carefully and efficiently for marketing)--speed = convenience = repetitive use
--the winner makes someone feel better, have a positive attitude, outlook--habituating means frequent use, every day (Coke = 'always')
--Pavlovs law: habituating means addressing your logo/theme/name with positive images they want to associate themselves with as well (Bud = cool river, mountains, party, people, attractive)
--tolerance means everyone is welcome, non-exclusive is key, openness (Coke = 'buy the world a coke')
My brand: quality, authenticity, technology care, efficient and smart, safe and reliable
--tie to economic engine (cataract experts, enhance eye ctr, or enhance optical ctr, etc)
--'Your world, your Vision."
"See your World Today".
"Clearly Your World".
"Eyecare & Surgery".
"Helping You see Your world". Show lots of people with happy good vision (old, middle, Yups).
"The biggest risk is not taking enough risk."
RULE MAKERS
A developing Rule Maker:
1. systematically absorb all the competition
2. patience: they want the lead and authority down the stretch, put up with short term flames
3. consistent improvement in finance and outlook, >1 $billion in sales, improving cash, gross margins, net margins and less debt
4. an absolute commitment to convenience
5. probably being sued by smaller competition
Best Stocks
1. repeat purchase products frequently (razors, Coke, food, jeans)
2. high gross margin (profit / cost of good > 60% or better)
3. net margin (profit / distribution and sales costs) 20% or better
4. sales growth 10% yearly or better
5. Cash: debt Ratio > 1.5X
6. Foolish Cash Flow (lower is better) < .6, no higher than 1, and 1.5 is very bad = (assets - cash) / Liabilities {debts owed out accumulate with more market power}
7. 2 points if you use the product, know it well,
0-2 points for any above, > 14 points is a winner.also: no new shares outstanding (<1% yearly is good)also: future possibilities, ~ is market cap likely to double, triple in outlook, economy and your opinion of importance of emerging market? can this group stay on top?
See Goog, KO, PEP, KFT, K, MRK, XOM.
In review, By category, Rule Makers:
A. Rule-Making Message (0-1 per item)
1. Familiarity
2. Openness
3. Optimism
4. Legitimacy
5. Inevitability
6. Solitariness
7. Humor
B. Rule Making Location (0-2 points per item)
1. Mass-market repeated purchasing
2. Gross margins
3. Net Margins
4. Sales growth
5. Cash-to-debt ratio
6. Foolish Flow Ratio
7. Your familiarity and interest (or what you see in public's use nearby)
C. Rule-Making Direction (0-3 points per item)
1. Rising gross margins2. Rising net margins
3. Share buybacks
4. Cash outgrowing debt
5. Lowering Foolish Flow Ratio
6. Expanding possibilities
D. Rule-Making Authority (0-4 points per item)
1. Gross-margin lead
2. Net margin lead
3. Cash-to-debt lead
4. Foolish Flow Ratio Superiority
5. Name-brand through convenience
E. Your Pure Enjoyment (0-1 point)
1. Yes or noTotal Score Analysis
Use Rule-Breaker analysis for under 1 Billion benchmark in sales, and giant companies with this Rule-Maker analysis.
Top Tier 50-60 points: keep em for a decade.
2nd Tier 40-49 points: solid companies, need to tell which direction they will be heading by market competition, emergence of industry, can be some of your greatest investments if headed toward the throne.
3rd Tier: debt, low margins, little cash, doomed for mediocrity or worse, ignore them.
4rth Tier: sell.
This individual investor stock approach with awareness to Rule-Breaker-Tweener-RuleMaker status will beat any mutual fund! If the mutual funds even came close they would absorb you in fees. For $200 you can start up 10 to 20 stocks and let them go for as many years as they appear to be growing.
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