Stock Liquidity: A Two-Edged Sword

The great 20th-century playwright Tennessee Williams once remarked, “If I got rid of my demons, I’d lose my angels.” For those not keen on literary bromides, the translation in 21st-century vernacular might be: The good news is also the bad news. Either sums up the double-edged sword of stock liquidity. The good news is that investors can obtain an instantaneous stock quote and sell their shares with the click of a mouse. That is also the bad news.

Ben Graham was the first to write about the antithetical characteristics of liquidity in his classic “The Intelligent Investor.” He compared the benefits of owning non-liquid investments to those of liquid securities during the worst of the 1931-33 depression. Graham observed that there was a kind of “psychological advantage in owning business interests which had no quoted market.” He argued that those with illiquid investments could convince themselves that their investments had kept their full value — since there were no daily market quotations to prove otherwise. On the other hand, owners of stocks and bonds subject to daily quotations obtained a sense that they were “growing distinctly poorer” each day. For those of us who still feel the sting of the 2008 decline, Graham’s words resonate.

Warren Buffett, a student of Graham’s and his eventual collaborator on the fourth edition of “The Intelligent Investor,” is the modern-day personification of the intelligent investor. In his 2013 annual letter to shareholders, Buffett provides an example of two very successful illiquid investments he made in real estate. “Those people who can sit quietly for decades when they own a farm or apartment house … often become frenetic” when exposed to daily stock quotes and commentary. He concludes, “For these investors, liquidity is transformed from the unqualified benefit it should be to a curse.”  Click here for more:

The Arizona Republic

Independent thinkers earn enviable investment returns

Urban legend suggests lemmings are so committed to their herd they will stick together even if they march right off a cliff to their inevitable death.

It is easy to understand why many find the adorable lemming’s behavior analogous to investor behavior at market tops.

Those of us who have run a race understand just how important it is to pace ourselves, removed from the pack, running our race — not the race of the person to the right or the left. In investing, we refer to this as a goals-based approach: a strategy that focuses more on personal, long-term goals than beating an arbitrary benchmark or owning the latest and greatest growth stocks. It is an approach that, by definition, removes investors from the lemming crowd.

Jeremy Siegel, author of “Stocks for the Long Run,” has conducted comprehensive research on stock performance over the past 100-plus years; as a result, he is a diehard proponent of value investing. The primary reason is the power of dividend reinvestment.

Siegel’s classic and most-cited example of why value stocks outperform growth stock analyzes an investment of $1,000 in (then) growth stock IBM compared with value stock Exxon (XOM) from 1950-2012.  For the rest of the article, click here:  The Arizona Republic

Friendly insights on commodity prices, undervalued stocks

My friend Kenny Polcari, a floor broker on the NYSE, he writes a daily market commentary. It is lively and direct and always insightful. At the end of each piece, he provides a recipe du jour. The guy is not only investment savvy — he can cook (his Fava Bean Risotto is a masterpiece). Last week Kenny provided a unique and erudite explanation of the decline in commodity prices: “Hey look! Commodities and the dollar have an inverse relationship…when one goes up, the other goes down.”

Because commodities are priced in dollars, investors in other currencies have to purchase the dollars to purchase the commodity, which becomes more expensive when the dollar rises. Got it? Higher prices reduce demand. And when demand declines, so does the price of the underlying commodity. Economics 101: supply and demand.

RELATED: Checking back on our 2014 stocks to watch

Why does this matter?  Read on:  The Arizona Republic

Don’t Let Market Volatility Distract You From You Goals

It is true. Stock returns can be unpredictable, which is why so many feel investing is like gambling — irrational, even scary. Echoing that sentiment, The Wall Street Journal’s Jason Zweig wrote over the weekend, “There is something poignantly human about every attempt to make markets behave as we all wish they would: always rising and making us richer, never falling and inflicting pain upon us.”

For all the volatility we’ve experienced this year, stocks are basically flat to modestly up. Down 300 points one day, up 250 points the next day. Exhausting, right? Only if we focus on the daily movements in stock prices. As investors, we must be in it for the long term, buying shares of stocks we are willing to own for a lifetime. Here’s why. According to the Dalbar 2010 Quantitative Analysis of Investor Behavior Study, the S&P 500 returned 9.14 percent over the previous 20 years, while the average investor in equity mutual funds earned 3.83 percent. This is because individuals tend to sell based on emotions, at just the wrong time. Yielding to emotions does not yield profits.

Let’s look at it another way.  To read more please click below:  TheArizonaRepublic

Investors need confidence in company’s managers

You may have heard the old adage: If you don’t like company management, vote with your feet and sell the stock.

Benjamin Graham, author of the 1949 classic The Intelligent Investor, calls that attitude “fatuous and harmful,” for it does nothing to improve bad management and merely shifts the problem to someone else. Graham was a believer that “investors make money not out of each other but out of … businesses.”

In the daily hype surrounding the stock market, the purpose of owning stocks is often lost on the average investor. The prevailing sense that investing is gambling or sport (words such as “bet” or “play” when referring to investing make me cringe) is unfortunate. Investing is neither. When we buy shares in a company, we are buying the company’s management team as well as a portion of the company’s future earnings. This is our management team, and we are counting on them to execute a sound business strategy and robust earnings growth.

Because the nature of stock ownership is a little less tangible than say, real estate, it is even more imperative we have confidence in the management team. This past weekend, Barron‘s published its annual listing of the “World’s Most Respected Companies.”

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Play your own game–invest, don’t trade.

Trading and investing are not the same thing. When we use the two words interchangeably we muddle the message. We confuse the issue.

The word trade comes from the 14th century Old English: tredan. The original meaning referred to a way or course — a manner of life. But by the early 1500s the meaning had evolved to include buying and selling as a means of exchanging commodities.

A trade, therefore, is a short-term activity with a very specific purpose — an acquisition or disposition.

Investing, on the other hand, is an activity with a longer-term intention. The word’s source, investire, is from the 14th century Latin meaning to clothe. By the 16th century, this word, too, had evolved into an activity that gives capital a new form. For our purposes: a greater, larger, plumper form.

RELATED: Checking back on our 2014 stocks to watch

MORE: Temper speculation with common sense

The differentiation between trading and investing matters because too many of us freely interchange the use of and meaning of these words. They are antithetical. They are mutually exclusive. Traders intend to produce a quick, short-term gain (though the statistics would show more frequently a loss) and investors seek to increase their wealth through the long-term ownership of sound businesses.

Our friend, Benjamin Graham, author of “The Intelligent Investor,” said it like this: “But everybody knows that most people who trade in the market lose money at it in the end…they are not investors.”

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Following up on our 2014 stocks to watch.

Last July we examined two industry leaders in two very different cyclical industries: Oracle Corporation —a stock I own — and International Paper.

ORCL is a leader in enterprise software and IP is a leader in paper and packaging (think: corrugated boxes and paper cups). At that time the two companies traded at comparable valuations of approximately 13 times estimated earnings. Both stocks paid a dividend. ORCL yielded 1.2 percent, while IP yielded a more substantial 2.9 percent. Both stocks were cheap as measured by their respective p/e’s, and, in particular, when compared withtheir peer group companies and the S&P 500.

RELATED: Tengler: Long-term strategy key to investing success

MORE: Human nature key in stock decisions

Despite their similar valuations in July 2014 both stocks had very different earnings histories. ORCL’s five-year earnings registered in the mid-double digits, and was expected to slow to the low double digits in the subsequent five year period. IP’s five-year earnings growth, on the other hand, was flat due largely to a restructuring; five-year estimated earnings growth was expected to grow in the mid-single digits.

Read more here:  The Arizona Republic