Extreme Volatility: What’s An Investor To Do?

Posted on September 20, 2015 by ntengler

This market reminds me of an old friend who had the unfortunate tendency to obsess over details. Hyper-focused on the Fed’s every word, investors are driving this market batty, parsing and splitting each piece of economic data, each Fed governor’s statement into smaller and ostensibly more consumable bits only to spew them out the following day. Up one session. Down the next. Manic, euphoric and very hard to live with.

So what is an investor to do?

Some are pulling money out of stock funds — to the tune of $16.2 billion last week alone and, according to Merrill Lynch, $46 billion over the last month. Sentiment, measured by various organizations, indicates investors are more bearish than bullish for the first time since the fall of 2011.

The experts are divided, too. According to Barron’s, about half of the 78 economists surveyed by Bloomberg predicted the Fed will lift rates, although traders in Fed-funds futures are much less certain, with about 28 percent expecting an increase. If the experts can’t agree, the rest of us have no chance.

Let’s consider a few facts. Click here for more: The Arizona Republic

Independent thinkers earn enviable investment returns

Posted on August 13, 2015 by ntengler

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

Posted on August 4, 2015 by ntengler

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.

Why does this matter? Read on: The Arizona Republic

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

Posted on June 25, 2015 by ntengler

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.

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.

Posted on June 18, 2015 by ntengler

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.

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.

When Market Levels Seem High Focus on the Best Companies with the Cheapest Valuations

Posted on May 13, 2015 by ntengler

The age-old maxim —”sell in May and go away,” is often quoted by traders as a sure-fire strategy. And, for seemingly good reason.

According to Yardeni Research, since 1928, the S&P 500 has risen an average of 1.9 percent from May to October but an impressive 5.2 percent from November to April. Yet since the beginning of this bull run the old adage has not held true. If you had sold in May during this cycle you would have underperformed the overall market by a cumulative 70 percent. Since 1926, the stock market has generated positive annual returns more than 70 percent of the time, so it turns out that despite market tradition, being out of stocks is often riskier than remaining invested.

So what strategy should an investor follow—if exiting is either too risky, or at the very least, undesirable—when convinced that the market is becoming fully, or overvalued? One of my tried-and-true investment rules? Buy stocks like you buy toilet paper — focus on price and yield.

For the remainder of the column, click here: The Arizona Republic

Buy What You Know

Posted on May 6, 2015 by ntengler

I am asked frequently if stocks can continue to go up. Would that I knew. Bespoke Investment Group recently provided some insight as to where the current bull market ranks historically. Six years into it, this rally qualifies as the fourth-longest of the 33 Dow Jones industrial average bull markets since 1900.

Since the 2009 low, the Dow Jones industrial average has risen approximately 175 percent — the fifth-largest gain since 1900. That is a nice run, but Bespoke also notes that in the 1990s bull market, the Dow rose 400 percent. All the more impressive since interest rates were a good deal higher then

Please click here for the rest of the column: Your Financial IQ

ETFs offer basketful of benefits for investors

Posted on December 24, 2014 by ntengler

Active money managers are having a tough time beating their benchmarks again this year. In fact, fewer than 15 percent of money managers were exceeding the market by the end of November.

You might say active management has hit a rough patch. According to Ben Levisohn of Barron’s, who cites the University of Chicago’s Center for Research in Security Prices, “From June 1983 to June 2014, the median fund underperformed the market by more than 80 percentage points.” That’s 30 long years of underperformance. Ouch.

If you invest in mutual funds, this information should be important to you. In addition to the high fees most funds charge, the majority have underperformed yet again in 2014.

What is an investor to do? Read the rest here: The Arizona Repbulic

High Investment Fees: Public Enemy #1

Posted on December 11, 2014 by ntengler

Lower prices are often synonymous with value. Surprisingly, the same is true when selecting investments. Look for the lowest-priced, diversified exchange-traded funds (ETFs), the cheapest mutual fund or any investment vehicle or manager that ranks among those with the lowest costs. For top long-term returns, be more focused on the cost of your investments than in seeking the top-performing fund.

How can I make such a definitive statement? Because the research supports it.

Morningstar reports that the average actively managed stock mutual fund sports an annual expense ratio of more than 1.4 percent. (Compare that to the average ETF fund fee of 0.2 percent.) If we assume a long-term return on stocks of approximately 9 percent and an average annual inflation rate of 3 percent, we obtain a real rate of return of 5.8 percent annually. Before accounting for the compounding of the expense ratio — yes, fees compound and erode total return just as dividends and interest compound and increase total return — you can see that an average annual fee of 1.4 percent consumes a significant portion of the average annual real total return of stocks of 5.8 percent.

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The Arizona Republic

Don’t Expect the Stock Market to Continue Current Path

Posted on October 22, 2014 by ntengler

Recency effect is the tendency to remember a more recent experience better than a previous experience.

Behavioral economists call this recency effect “availability” and it is programmed into our DNA: I touch a hot stove — ouch!; I learn not to touch a hot stove again. Eventually I use the contained flame to my advantage, to prepare meals for my nourishment. But the result of touching the stove and getting burned is still stored in my memory, inspiring me to use a hot pad and keep my hands well away from the heat.

For investors, recency effect can bias investing decisions based on recent market performance. Whether up or down, we tend to extrapolate the recent event into the future. If the market is going up, we are more likely to act on expectations of a rising market. The converse is also true. Both tendencies can be dangerous.