• Growth Versus Value Investing

    This Zachs Investment News interview describes the dilemma facing traditional value investors and traditional growth investors. Growth investors seek companies with “spectacular” earnings growth, but they risk buying stocks when the stocks are overvalued (or overpriced) by the market. On the other hand, value investors look for low P/E ratios because of their low stock prices.  But many companies with low P/E ratios are trading at low stock prices because they have little to no growth potential.

     

    For discussion:

    1.  What does the P/E ratio tell an investor? What does a high P/E ratio suggest? What does a low P/E ratio suggest?

     

    2.  According to this video, how might an investor screen for stocks that offer both qualities: good growth potential and good value?

     

  • What's It Worth?

    This very unusual property featured in this video is the site of castle ruins and a 2,000-square foot residence with no running water. Situated on 4.5 acres in New York state, Helderberg Castle is offered for sale at $179k.

              

    So what’s it worth?

    For discussion:

    • How would you go about determining the market value of this property?
    • Would you base the market value on replacement value or liquidation value?
    • What is the difference between this home’s book value and its market value?
  • Investing Like a Wealthy Individual

    How do you make a small fortune? Start with a large one.

    ~ anonymous

     

    Investing like the wealthy involves making wise investment decisions. According to MarketWatch (22 Jan 2014):

     

    “Beginning in the second quarter of 2012, members started to shift allocations to private-equity holdings and they have built on and maintained those positions,” says Michael Sonnenfeldt, founder and chairman of TIGER 21, in a prepared statement.

     

    Sonnenfeldt estimates that TIGER 21 members finished 2013 with average portfolio returns in excess of 10% — “almost certainly,” calling it “the best year since prior to 2008, by a long shot.”

     

    Now a 10% gain might seem a failure in a year when the return on the benchmark S&P 500 index SPX -0.89%  topped 32%, including dividends. But this TIGER 21 portfolio is a capital-preservation-minded strategy — a 23% commitment to publicly traded stocks is a token presence.

     

    And this reflects what many rich people and their advisers know: Over time, trying to shoot out the stock-market lights is a recipe for shooting yourself in the foot — or worse. With inflation in check, a 10% return from a moderate-risk portfolio is a good haul.

     

    For discussion:

     

    Which of the high net worth investment practices can the average investor copy?

     

     

     

     

  • Private Equity: Coming Soon to a 401k Near You

    A recent article on CNBC discussed private equity funds with Alice Handy, CEO of Investure.  From the article (MacBride, 22 Jan 2014):

     

    CNBC: Institutions and the wealthy have long relied on private equity for the potential for stellar returns. Between 1997 and 2011, for instance, private equity returned 11.9 percent for defined benefit plans. Now the private equity industry is citing those stats to persuade fund managers and retirement plan providers to include private equity in 401(k)s. Is this a good idea for individual investors?

     

    Handy: I understand why the industry would want to be in 401(k)s. It's sort of crazy for the average investors.

     

    The first thing is that it is a very illiquid investment, so it has to be an investor with a long time frame. The only retirement participants that really could put them in 401(k) accounts are young people.

     

    As institutions, we expect a higher return because of the illiquidity, so you should be prepared to demand that higher return. You also need to know which funds you're getting. There's a huge difference between the top quartile and bottom quartile funds.

     

    For discussion:

     

    What kinds of investments could be included in a private equity fund?

     

    What time horizon is reasonable to expect with private equity investments?

     

    Private equity is appropriate for which types of investors?

     

  • Earnings Season and Stock Prices

    This coming week is expected to see some jumpy stock prices as earnings are announced in the four days following MLK day.

     

    From CNBC (Domm, 17 Jan 2014):

     

    Earnings are expected to grow about 7 percent in the fourth quarter, and about half of the 50-odd S&P names that have already reported beat expectations, compared with 37 percent that missed, according to Thomson Reuters. The beat ratio is fairly low though it is early in the earnings season.

     

    … Emanuel said the tone of the market has changed so that individual stocks will trade more independently from their sectors and the market as a whole. The top 50 stocks in the S&P 500 have become less correlated to one another than at anytime since before the recession, he added.

     

    For discussion:

     

    According to discounted cash flow (DCF) valuation, how do earnings influence the value of a share?

     

    Why is correlation among stock returns important?

     

  • Gender Differences in Hedge Fund Performance

    According to a recent report by Rothstein Kass cited in Investment News, women hedge fund managers performed better than the overall hedge fund market.

     

    From the article:

     

    The idea that women generally manage money and invest differently than their male counterparts is not a new finding, but a growing body of evidence suggests that those differences can add up to better performance.

     

    … According to the Rothstein Kass research, male investors will trade on average 45% more than their female counterparts. And when it comes to single men versus single women, men trade 67% more.

     

    “We know that portfolio turnover is just one piece of the equation, but it can add up to performance differences,” Ms. Jones said.

     

    For discussion:

     

    What can these findings about gender differences suggest when it comes to investment portfolio management?

     

  • How To Know If You've Been a Victim of Identity Theft

    According to the Justice Department, “Approximately 16.6 million persons of 7% of all U.S. residents age 16 or older, were victims of one or more incidents of identity theft on 2012” (Harrell and Langton 2013, p. 1). 

    According to CNBC (Weisbaum, 18 Jan 2014):

    Most people find out they've been victimized when they are contacted by their financial institution. Fraud experts say we can't rely on someone else to catch the problem, though, and must take steps to protect ourselves.

    "The longer ID theft goes on, the more damage is done and the longer it takes the victim to recover from it," said Eva Velasquez, president and CEO of the nonprofit Identity Theft Resource Center.

    That's why it's so important to be on the lookout for any warning sign that your personal information has been stolen and is being used.

    "Surveys show nine out of 10 people don't check their financial statements," Siciliano said. "That's irresponsible. You shouldn't be waiting for a retailer to tell you there's been a breach. You should be checking your financial statements more than you check your Facebook page, but people's priorities are skewed."

     

     

    (source: “Victims of Identity Theft, 2012,” December 2013, p. 3 available at http://www.bjs.gov/content/pub/pdf/vit12.pdf)

    For discussion:

    • According to the article, what are the seven signs you’ve been a victim of identity theft?
    • What are some ways you can protect yourself against identity theft?

     

  • Who To Watch for the Next IPOs?

    According to this CNBC, Pinterest raised the most cash last year and this may indicate that investors are expecting the company to go public soon. Box and Dropbox, two cloud storage companies, are also expected to go public this year.

     

    For discussion:

     

    What factors contribute to the increase in venture capital investing in these early stage companies?

     

    Which of the companies listed in the video would you invest in? Why?            

     

  • Where's the Dow Going Next?

    In this CNBC interview, Jeremy Siegel of the Wharton School suggests that the market is closer to fair market value than we were a year ago, but that we’re still below fair market value. The Dow is currently trading around 16,379 but Professor Siegel predicts 18,000.

     

    For discussion:

     

    How would you determine fair market value for a stock index like the Dow Jones Industrial Average? What model would you use and what inputs would you estimate?

     

    Do you agree with Jeremy Siegel that the market is not trading at fair value? If so, what does this suggest about market efficiency?

     

  • Coffee Market On the Rise

    According to this CNBC video, coffee prices are on the move. News of reduced coffee supply is sending coffee futures higher. But it’s not just supply. Demand is strong and forecasts of higher prices is continuing to push prices higher.

     

    For discussion:

     

    What are some of the factors listed in this CNBC related article that are driving the price of coffee futures?

     

  • Improvements in Small Business Lending

    Traditionally, small business lending was more about the relationship of the entrepreneur and his or her banker. Larger commercial debt, however, was based on numbers and “hard” data.

     

    In this Bloomberg video, these lenders describe their models for lending to small businesses. Interestingly, the ease by which information can be gathered and shared seems to be shifting small business lending away from the relationship banking model of old.

      

    To view this Bloomberg video, click here

  • Cash--Friend or Foe?

    Cash is an investor’s friend. But it can also be the enemy of a portfolio.

     

    According Citi Private Bank (Delevingne, CNBC 11 Jan 2014):

     

    "Have investors raised their risk tolerance too much while reducing their liquidity preference too little? The value of select less-liquid investments may be underestimated," said the report, which was co-written by Global Chief Investment Strategist Steven Wieting and others.

     

    "With higher potential returns, greater control, and the ability to participate in strategies unavailable in public markets, illiquid investments can potentially offer a premium to liquid investments and add material value to a balanced portfolio, especially when consistently implemented," it added.

     

    For discussion:

     

    What are some of the illiquid assets that are recommended in this article? What are some of the characteristics of these assets?

     

  • The Wolf of Wall Street Story Continues

    The Wolf of Wall Street Story Continues

     

    How can you become a successful motivational speaker and sell books and movies based on your life story? By going to prison after swindling millions of dollars, that’s how.

     

    The story of Jordan Belfort is the subject of the new movie, The Wolf of Wall Street, starring Leonardo DiCaprio. Belfort claims that he is turning over 100% of the proceeds from the movie and books to make investors whole, but prosecutors don’t believe him.

     

    From the NY Times (Antilla, 10 Jan 2014):

     

    Robert Nardoza, a spokesman for Loretta E. Lynch, the United States attorney in Brooklyn, took issue with Mr. Belfort’s claims.

     

    “Belfort’s Facebook comments are substantially inaccurate,” he said. “The government has seen nothing to suggest that even 100 percent of Belfort’s profits from his book and the movie ‘Wolf of Wall Street’ would yield, in his words, ‘countless millions,’ much less the approximately $100 million that is still owed to the victims.”

     

    And later in the same article:

     

    Mr. Belfort has offered several accounts of how much money his victims might receive from his book and movie deals and of the status of his negotiations with the government. New York magazine said in an article published in November that Mr. Belfort claimed to have signed over all the proceeds and profits from his story to the government, but no signed agreement has been executed. Both the United States attorney and Mr. Belfort’s lawyers say the two sides are negotiating.

     

    As for the amount that investors might see from his books and movie, along with his estimate of “countless millions,” he has also told Bloomberg Businessweek that his books and movie revenue “will probably be 20, 30 million dollars.”

     

    Mr. Nardoza said that Mr. Belfort is giving the wrong impression in his claims. “He insinuates in his Facebook post that he’s going to make victims whole by all this money from the book and movie,” he said. “But he still owes victims $100 million,” which is not a realistic amount to expect from the movie proceeds in Mr. Nardoza’s view.

     

  • Which Institutions Are Systemically Important?

    Banks aren’t the only financial institutions too big to fail. According to the Financial Stability Board (FSB), investment funds with more than $100 billion in assets may also be too big to fail.

     

    From Bloomberg (Moshinsky, 9 Jan 2014):

     

    The FSB, which brings together regulators and central bankers from the Group of 20 nations, is ranking banks and insurers by their potential to cause a global meltdown and demanding bigger financial cushions to avert a repeat of the 2008 credit freeze. Industrial & Commercial Bank of China Ltd., the world’s most profitable lender, was added to the FSB’s list of too-big-to-fail banks in November. Insurers such as American International Group Inc. and Allianz SE were deemed systemically important in July.

     

    For discussion:

     

    What are the arguments for and against listing non-bank financial institutions as systemically important?

     

  • Used Car Economics: How Effective Was Cash For Clunkers?

    This CNBC video talks about the short term effect of the cash for clunkers program in 2009. Santelli quotes independent research:

     

    “The program increased new vehicle sales by about 0.36 million during July and

    August 2009, implying that approximately 45% of the spending went to consumers who would have purchased a new vehicle anyway.”

     

     

    For discussion:

     

    What does Santelli describe is the impact of cash for clunkers on used car prices? Which segment of the population experiences this impact?

     

  • Options on Airline Tickets

    How would you like to find an affordable way to lock in the price of an airplane ticket but still have time to shop around for a better deal?

    According to BloombergBusinessweek (Bachman, 3 Jan 2014), there may be a way.

     

    From the article:

     

    Options Away, a startup based in Chicago, is seeking to build a market for options on airfares, a tiny piece of price insurance that can lock in an airfare for a specific period and give a buyer time to deal with the purchase later, after considering travel plans with family and friends.

     

    … If it appears that a particular flight might sell out during a customer’s option period, the company will purchase a refundable ticket on the flight to secure a seat—an expensive ticket that would dwarf whatever sum Options Away earned selling the option. The company, which is licensed as a travel agency, has not had to buy a refundable ticket so far, Brown said. “Airline tickets follow a fairly well-set, well-defined set of rules, which is the revenue-management process,” he says.

     

    The idea is based on the same kind of options you can purchase on shares of stock, which gives the holder the right to buy the stock later at a specific price, regardless of the current market price.

     

    For discussion:

     

    What kind of option contract (call or put) is the option to on the airplane ticket?

     

    What factors would Options Away use to price the contracts?

     

     

  • How To Choose A Growth Stock for 2014

    According to CNBC’s Jim Cramer, “There should always be room in your portfolio for at least one turbo-charged growth stock.”

     

    This CNBC segment of Mad Money describes how to choose between two of the best performing growth stocks: Google (GOOG) and Amazon (AMZN).

     

    Here’s Cramer’s 10 point system:

     

    1.     Is there potential for multi-year growth?

    2.     Is the total addressable market big enough to sustain the company?

    3.     Can the company stay competitive?

    4.     Can the company return capital over time by dividends and buy backs?

    5.     Can the company expand internationally?

    6.     Can the balance sheet support strong growth?

    7.     Is the company expensive based on earnings 4 or 5 years down the road?

    8.     Does the company have good management?

    9.     Does the company need economic growth to make its numbers?

    10.  Can the company maintain or grow its margins.

     

    To hear which of the two stocks Cramer names winner, watch the video here.

     

     

  • Who Will Fix the "Skills Gap?"

    Photo by j.o.h.n. walker licensed under Creative Commons and available at http://www.flickr.com/photos/whatcouldgowrong/4608963722/sizes/m/in/photostream/

     

     

     

    According to JP Morgan CEO, Jamie Dimon, good help is hard to find. In a recent interview, Mr. Dimon discussed the underprepared entry-level employee and what the bank is doing to train new workers:

     

    As Dimon noted in an interview after the announcement, this “skills gap” — the complaint that businesses simply cannot find the workers they need to fill millions of open jobs (at a wage level that the businesses are willing to pay) — is something you hear a lot about from manufacturing and tech companies. Not so much from banks.

     

    But the chief executive of JPMorgan estimated that such a gap may be holding back economic growth and keeping unemployment a percentage point or two higher than it otherwise could be. He also said it’s the classic role of a bank to help bridge those structural holes in the economy.

     

    For discussion:

     

    What types of skills do you think are lacking among college graduates today?

     

    Whose responsibility is it to train new workers—universities or the employers?

     

    What advice would you give a new business student to help him or her become successful in banking someday?

     

  • Will You Make Wise Financial Choices in 2014?

    photo of money tree courtesy of Odditycentral.com 2013 - Oddity Central is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 3.0 Unported license

     

     

    Will 2014 be your year of wise financial decisions or will you make some of the “dumb mistakes” listed in this Bankrate.com article (Bucci, 26 Dec 2013).

     

    Some of the mistakes to avoid in 2014 include:

     

    ·       Choosing to go to the most expensive college you’ve been accepted to without knowing what you want to be when you grow up.

    ·       Not checking your credit report before applying for a job.

    ·       Failing to keep an emergency fund.

    ·       Co-signing a loan for someone else.

     

    For discussion:

     

    What is your top financial advice to a young adult? What about to someone approaching retirement?