Can Money Managers Add Value To Your Portfolio?

Based on a dismal record of money managers to outperform benchmarks, we have to take the argument that markets are efficient very seriously.  Recent statistics shows that 0.002% of Hedge Fund managers outperform the S&P 500 over a period of 5 years time!

When we go about building our investment strategy, benchmark, style, or passive and active investing, we must consider the overall average performance of each investment class over a period of at least five years.  Doing so, ensures your money has staying power.

In our own practice, we use only institutional-class index funds.  Today it is possible to index almost the entire world.  I think that approach gives us the highest probability of a successful outcome with the lowest risk.  To the extent possible, I want to see predictable results.  I hate underperforming the benchmark more than I would enjoy overperforming.  That makes me pretty much like my clients: risk averse. 

On a side note:

A special thanks to Dr. Karl W. Einolf, Ph.D. of Mount St. Mary’s University for allowing me the opportunity to lecture his Corporate Finance classes yesterday.  It’s truly an honor and I hope I was able to impart some practical knowledge for the students as they go on to graduation and beyond! 

Overcoming Investing Hurdles

I’m sure you have many reasons for not starting an investment program.

• No money.
• No knowledge.
• No time.
• No broker.
• Too old.
• Too young.

I’m sure you think these are legitimate reasons.  They are not. 

There are no good excuses for not investing.  I don’t care how young or not so young you are.  How rich or not so rich you are.  How much you know or don’t know.  It has never been easier or cheaper to invest. 

If you have just $50, there are literally hundreds of investment opportunities awaiting for you, including with our own firm, CAM Trading.  If your employer offers a 401(k) plan, you can invest as little as 1% of your salary.  That means if you make $400 a week, you can invest as little as $4.00. 

Four bucks.

And you don’t need a broker to invest.  You can buy some of the best companies in the world without a broker and for little or no fees.  Nor do you need a broker to buy some of the best mutual funds in the business. 

In short, there are no excuses for not investing.  So, start now and get in the habit of it, you’ll appreciate the results in the future!

Start Them While They’re Young

If your youngster shows an interest in investing, it has never been easier to get him or her started regardless of age.  Once an individual reaches the age of majority (eighteen years in most states), he or she may have an investment account registered solely in his or her name.  Youngsters under the age of eighteen are not permitted to have their own brokerage accounts.  However, several ways exist for parents to introduce interested youngsters to investing. 
Dividend reinvestment plans (DRIPs) may provide an interesting investment vehicle for kids.  Many child-familiar companies offer DRIPs-Walt Disney, Mattel, just to to name examples.  Since many DRIPs permit very small investments, the programs are a good way for youngsters with limited funds to start investing in the stock market.  Through Sharebuilder, youngsters can have an account setup for them to buy stocks in specific dollar amounts automatically.  Don’t have $300 to afford a share of Apple stock?  No problem, Sharebuilder offers fractional share purchases.
If you decide to establish an investment account for a minor, consider carefully how you want the account registered. If you choose to have the account in your own name, you will be responsible for taxes on the account.  The good thing is you will also retain complete control over the account for as long as you want. 
An alternative is to set up the account as a Uniform Gift to Minors Account (UGMA) through reputable brokers like Rydex, Fidelity and Cam Trading. Funds in the account are in the minor’s name and Social Security number and are considered to be owned by the minor.  Dividends paid on the account are taxable, most likely at a preferred tax rate.  The adult custodian is responsible for the account until the minor reaches the age of majority.  Parental control is lost at the age of majority, which can be seen as a downside to UGMAs. 
Lastly, certificates of deposit and savings bonds are okay investments, kids should own stocks or stock mutual funds.  Risk is the last thing your child needs to worry about in an investing program.  He or she needs to capitalize fully on the power of time in their investment program as they have the advantage of time working for them. 

Rule of 72

I find the Rule of 72 useful when comparing expected returns between stocks and other investments.  The Rule of 72 says that in order to find out how many years it takes your money to double in a particular investment, choose a rate of return and divide it into 72. 

For example, if the long-run average annual return of stocks is 11%, the Rule of 72 means that, on average, stock returns double every 6.54 years (72 divided by 11).  If the long-run average return on bonds is 5% per year, then bonds double every 14.4 years (72 divided by 5). 

Let’s see what happens to a $10,000 investment, over 26 years, earning 11% per year.  That $10,000 will double nearly four times (26 divided by 6.54).  Thus, $10,000 becomes $20,000 becomes $40,000 becomes $80,000 becomes approximately $151,000.

Now, let’s look at bonds.  Since bonds return, on average, 5% per year, the value of the bond doubles nearly twice in 28 years.  That means $10,000 becomes $36,000 at the end of 26 years. 

Which would your rather own-stocks or bonds?  Of course, looking at the current economic conditions – don’t answer that yet, but the moral of this story:  Your money grows best by investing heavily in stocks!

Why You Should Avoid Speculating in Futures, Options, and Speculative Stocks

It’s happened to me.  It will happen to you.

Your investment program is going along quite nicely.  You’ve made some nice gains on stable blue chip company stocks.  But it has gotten boring and it feels like something is missing.  You hear about people making a killing on speculative stocks.  Maybe even heard it on CNBC or some other “trusted” financial channel how some trader managed to score big on some futures trade.  You don’t want to wait 25 years to get rich.  You want BIG profits now!  So you create room in your portfolio by venturing into the options and futures markets.  You buy gold because, hey why not?  Everyone is doing it and it can only go higher from here! 

In short, you stray from your investment approach, to roll dice. 

Big mistake. 

Making money consistently in the futures and options markets is difficult because you have to be right about the investment and the timing.  Buying stocks is an easier way to make a buck.  As long as you’re right on the stock, your timing need not be perfect.  You can wait until your reasons for buying the stock pan out.  When you buy options and futures contracts, the clock starts ticking immediately.  You can’t afford to be patient, hoping your investment thesis comes to fruition.  With options, you have at most nine months for your idea to develop.  That’s not a long time.  Most options expire worthless.  You shouldn’t think yours will be any different. 

Buying initial public offerings (IPOs) usually is another losing game for individual investors.  The problem with buying IPOs is that the best IPOs are not available to individual investors.  All those Internet IPOs you read about that went from $10 to $60 were never available at the $10 price for individual investors like you and me.  Only the best customers of the of the investment firms taking the company public get a piece of the best IPOs.  Oh sure, you can buy the stock after it goes public and has already jumped 300%.  That’s a bad idea, since many IPOs return to their initial offering price over time.  And if you are ever approached by a broker who wants to sell you shares in the next “hot” IPO, run for the hills.  Any IPO in which that’s offered to you and me is just junk that none of the big guys want.  We consider IPOs to be in the “Speculative Stocks” category since most of them have earnings that are hard, if not impossible, to determine.  

Investing for Your Children’s Future

There are a million ways to the truth in money management, and no such things as the “Holy Grail.”  And if you’re raising children and facing serious tuition prospects in the near future, here are a few guidelines to follow.

Of course, college education today can cost as much as $40,000 annually.  And that’s before you buy books, much less the computer-related fees that are standard in higher learning today.  If you take the route into private education earlier, at the high school level, the costs are still mind-boggling.  Boarding schools can charge more than $24,000 a year.  And because many parents are in a dual income (professional) household, preschool and private grammar schools can set you back $15,000 a year or more. 

I believe in a three-part practical approach to investing for a child’s education.  Start with U.S. Treasury zero coupon bonds.  These bonds pay no interest in cash.  You can buy them at a discount, say, 30 cents on the dollar.  They mature at face value in a specified time frame.  This way you can target maturities to match your requirements like, maturities to coincide with freshman year in college, and so on. 

Currently, money doubles in these instruments in 11 years so that $5,000 automatically becomes $10,000 in October, 2020.  This works out to be about 5.9% annually.  Not so hot, you say?  Perhaps, but it makes sure that part of the tuition is taken care of automatically, and you don’t have to suffer through the sometimes (if not more often) negative bias of the stock market. 

The second part of investing for children’s education involves periodic purchases of a good growth mutual fund.  Such can be found through Rydex and CAM Trading.  And money should probably be systematically added to the fund so that you can take advantage of dollar cost averaging (putting similar amounts in monthly or annually, often when prices are lower and more shares can be bought).  Any financial website can provide you with historical returns of all the mutual funds they carry.  The earlier in a child’s life you start this program, the better it will work. 

The last part is the most aggressive part, and like the growth-oriented mutual fund, it requires patience and discipline.  It involves hiring a professional investment management firm where your money can take advantage of both the ups and downs of a cyclical market. 

Put your plan into action.  The earlier, the better.  Invest at the same time each year, like a child’s birthday, or during the holidays.  It makes it simpler to remember and becomes automatic.  It also helps you stay discipline and patient. 

Should You Sell Your Gold?

With news of gold prices hitting $1,350 an ounce – buyers of all kids are eager to get their hands on all that glitters.  That includes the contents of your jewelry box.  Gold-party organizers, jewelers, mail-in companies and even kiosks at the mall want to pay for what you’ve got. 

While it’s easy to be dazzled by visions of quick cash, some (if not most) individuals and firms might take advantage of your enthusiasm.  So, here are a few tips to make sure you get the best deal when selling your metal.

1.  Know what its worth.  Buyers can offer widely different amounts for the same pile of earrings.  I found a simple formula for determining your gold’s worth:  Weight in Grams (use your kitchen scale) x Current Gold Market Price / Divide by one of these (10k = 74.8, 14k = 53.2, 18k = 41.5, 24k = 31.1).  Then multiply by 0.50 and 0.80 to get a fair price within that range. 

2.  Ignore the mail-in buyer ads that are blanketing the airwaves.  When you send off a piece of jewelry, you’re unlikely to go through the hassle of getting it back in order to compare prices.  As a result, these mail-in companies are able to low ball because they know they have a captive audience.  You might be better off shopping your gold around traditional jewelers, coin dealers, pawnshops, even gold parties.  Remember, just because you go into a store and ask what they’ll pay doesn’t mean you have to sell on the spot.  You should think about it first.  Also, there are some advantages to selling to jewelers as you may be able to get money for diamonds in the piece, generally if they’re at least 0.25 carat. 

3.  Consider a trade-in.  You might get a better deal if you’re willing to trade up your jewelry.  If you’re interested in a swap, visit at jeweler who sells pieces you’d like to wear.  And when someone admires your new ring, you can say, “Oh this old thing?”  (Literally).

Back-testing Annual Stock Predictions

It’s always fascinating to me when major magazine publications such as Money or Forbes issue their annual “Investor’s Guide” in the beginning of the year.  Assuming that most investors rebalance their basket of stocks around the holiday season, let’s take a look at the predictions from Money Magazine for 2010 and see what investors would have made if they followed the advice. 

There are two things to note in this observation.  One is, at the time of this writing it is, October 6th, 2010.  Not even a full year has gone by since these picks were made, so I am merely observing the progress year-to-date.  And two, they cover nearly 200+ stocks, bonds and ETFs in the entire issue and to list them would be too tedious (for both reader and writer).  So, I am simply including those picks with the most “conviction” – that’s when they feature fund managers who have done exceptionally well in the past year.

 Top Picks From Top Pros

That’s the headline for the top five of 2009’s most successful funds.  Now, let’s see how they do this year thus far. 

Bruce Berkowitz/Fairholme (FAIRX):	Money Magazine	Current Price	Gain/(Loss) %	Total Return
Humana (HUM)	$42.04	$50.50	+20.01%
WellPoint (WLP)	$57.43	$55.11	-4.03%
Pfizer (PFE)	$18.32	$17.24	-5.89%
Forest Laboratories (FRX)	$31.19	$31.31	-0.38%
Total Return				+9.71%

David Herro/Oakmark International (OAKIX)	Money Magazine	Current Price	Gain/(Loss) %	Total Return
Toyota (TM)	$83.42	$71.25	-14.58%
Richemont (CFR.VX)	$32.35	$47.70	+47.44%
Publicis Groupe (PUBGY)	$40.21	*$49.70	+23.60%		*Split Adjusted
Total Return				+56.46%

Eric Ende/FPA Perennial (FPPFX)	Money Magazine	Current Price	Gain/(Loss) %	Total Return
Varian Medical Sys. (VAR)	$46.07	$61.81	+34.17%
Signet Jewelers (SIG)	$24.78	$32.62	+31.64%
Total Return				+65.81%

Diane Jaffee/TCW Dividend Focused (TGIGX)	Money Magazine	Current Price	Gain/(Loss) %	Total Return
Packaging Corp. (PKG)	$42.04	$50.50	+20.12%
J.P. Morgan (JPM)	$57.43	$55.11	-4.04%
Pfizer (PFE)	$18.32	$17.24	-5.89%
Total Return				+10.19%

John Rogers/Ariel Appreciation (CAAPX)	Money Magazine	Current Price	Gain/(Loss) %	Total Return
CB Richard Ellis (CBG)	$12.05	$18.03	+49.62%
CBS (CBS)	$13.81	$16.66	+20.63%
McCormick (MKC)	$18.32	$41.73	+127.78%
Total Return				+198.03%

Money Magazine’s Average Total Return: +68.04%  Vs.  S&P 500 Year-to-date:  +2.341%  (Wowza!)

Now, before you fire your stock broker to jump on these hot stocks, there are a few things you should know.  These stocks are coming off of exceptional bottoms from the 2007/2008 housing collapse and have not yet surpassed their peak prices (with the exception of one or two on the list).  While approximately 75% of the total stock market are currently in positive territory year-to-date, only a handful of them have reached back to their 2007 highs.  Obviously, this is only a small sample of those stocks and may not necessarily suit your needs.  But, aside from the technical details, a return of +68.04% in a year is extremely rare, if not impossible only because there are strong psychological forces at work that prevents from achieving that.

By the way, if you’re wondering, here are the figures for each funds’ five year annualized return.

Fairholme (FAIRX): +7.7%
Oakmark International (OAKIX): +6.6%
FPA Perennial (FPPFX): +2.1%
TCW Dividen Focused (TGIGX): -1.8%
Ariel Appreciation (CAAPX): +1.3%

Believing in Your Product or Service

All too often, Financial Advisors who are just starting out (and some veterans, too), get stuck promoting a product or service they know is a dog.  I know this sounds harsh, but lots of people have earned a living simply by taking the money and checking out at the end of the day.  But I promise you this:  If you don’t believe in what you’re doing, you won’t have the energy it takes to find out what you need to understand your customers and the value of your product to them. You won’t want to do whatever it takes to make your idea a success.  And if you’re a “Samurai Worrier,” you probably need a strong belief in your product just to drag yourself into work each day, let alone be successful at promoting it.

The Financial Services industry has the second highest employee turn over rate in the nation!  Second, only to Real Estate sales.  Why?  Because many people find that, while the money and income can be good, the product or service they are required to sell to get to that certain comfort level requires true passion and belief.  Many people get into Real Estate sales because they are on one of these three stages in life.  They were laid off or fired from their jobs, retired, or they have the entrepreneur spirit and wanted to be on their own.

I’ll admit it, I too, got foolish and got into Real Estate sales.  I was 28 at the time, and retired from my full time employment.  CAM Trading was self-sufficient enough and generated passive income for me, so I was able to take some of my time and money to pursue that.  Plus, I had seen an infomercial one late night and thought, “wow, I could be sitting in my own private island right now, wearing a buttoned-down floral shirt, but only if I call right now and order, operators are standing by!”

Two weeks after I made my first real estate sale (and a total time investment of 2 months), I decided that my passion wasn’t there.  I couldn’t get myself out of the house and into that drab Realty office to sit there for an hour answering phones.  I enjoyed the training and learning about real estate law, but it was a means to an end (getting to buy my private island to sip some fruity drink).   I ultimately wanted to relate to, talk to, and manage other people’s investments.  Being a realtor didn’t allow for that.

Unlike my real estate sales experience, I’m in this business because I know we can do better for people regarding their investment choices, in fact, we have in the 5 short years of going pro.

So, when you do what your inner calling directs you to do, you’re more comfortable, happier, more energized, more focused.  And those qualities bring success, whatever success means for you.