After some forty years of banking and investments, I retired in 2001. But since I do not golf, I soon found retirement to be very boring. So I decided to return to the investment world after ten months. However, those ten months were not a complete waste of time, for I had spent them in trying to utilize my forty years of investment experience to gain perspective on the most recent stock market "bubble" and subsequent "crash."
There were several people who saw the stock market crash coming, but they had different ideas as to when it would occur. Those who were too early had to suffer the derision of their peers. It was difficult to take a stand when so many were proclaiming that we were in a "new era" of investing and that the old rules no longer applied. Since the beginning of 1998 through the market high of March 2000, among 8,000 stock recommendations by Wall Street analysts, only 29 recommended "sell."
I am on record as having called for a cautious approach to investment two years before the "Crash of 2000." In an in-house investment newsletter dated April 1998, I have a picture of the "Titanic" with the caption: "Does anyone see any icebergs?"
When I resumed employment in 2002, I happened to glance at the chart on the last page of Value Line, which showed the stock market as having topped out, by coincidence, in April 1998, the same date as my "Titanic" newsletter! The Value Line Composite Index reached a high of 508.39 on April 21, 1998 and has been lower EVER SINCE! But on the first page of the same issue, the date of the market high was given as "5-22-01"! When I contacted Value Line about this discrepancy , I was surprised to learn that they had changed their method of computing the index for "market highs" from "geometric" to "arithmetic." They said they would change the name of the Value Line "Composite" Index to the Value Line "Geometric" Index, since that is how it has been computed over the years. Currently Value Line is showing a recent market low on 10-9-02 and the most recent market high, based on this new "arithmetic" index, on 4-5-04,
ANOTHER ALL-TIME HIGH! If they had stayed with the original "geometric" index, the all-time high would still be April 21, 1998!
Later that year, I was pleasantly surprised to read in "Barron's" an interview with Ned Davis, of Ned Davis Research, that said that his indicators had picked up on the bear market's beginnings in April 1998, the same date as my "Titanic" newsletter! So, my instincts were correct! I believe that we are in a "secular" downturn that began in April 1998 and the "Bubble of 2000" was a market rally in what was already a long-term bear market.
Another development transpired soon after I resumed employment in 2002. I happened to notice one day that, in its "Market Laboratory," "Barron's" had inexplicably changed the P/E Ratio of the S&P 500 to 28.57 from 40.03 the previous week! This was due to a change to "operating" earnings of $39.28 from "net" or "reported " earnings of $28.31 the previous week. I and others wrote to "Barron's Mailbag" to complain about this change and to disagree with it, since these new P/E ratios could not be compared with historical P/Es. "Barron's apparently accepted our arguments and, about two months later, changed back to using "reported" earnings instead of "operating" earnings and revised the S&P 500 data to show a P/E Ratio of 45.09 compared to a previous week's 29.64.
But a similar problem occurred the next day in a sister publication to "Barron's." On April 9, 2002, "The Wall Street Journal" came out with a new format that included, for the first time, charts and data for the Nasdaq Composite, S&P 500 Index and Russell 2000, in addition to its own three Dow Jones indices. The P/E Ratio for the S&P 500 was given as 26, instead of the 45.09 now found in "Barron's." I wrote to the WSJ and after much correspondence back and forth, they finally accepted my argument and on July 29, 2002 changed the P/E Ratio for the S&P 500 from 19 to 30! I had given them examples showing where some financial writers had inadvertently confused "apples" with "oranges" by comparing their P/E of 19, based on "operating" earnings, with the long-term average P/E of 16, based on "reported" earnings.
Because I started to be cautious about investing as early as April 1998, since I thought that price/earnings ratios for the stock market were perilously high, I was not hurt personally by the "Crash of 2000" and had tried to get my clients into less aggressive and more liquid positions in their investment portfolios. But the pressures to go along with the market were tremendous!
Price/earnings ratios do not enable us to "time the market." But comparing them to past historical performance does enable us to tell when a stock market is high and vulnerable to eventual correction, even though others around us may have lost their bearings. High P/Es alert us to a need for caution and a conservative approach in our investment decisions, such as a renewed emphasis on dividends. Very high P/Es usually indicate a long-term bear market may ensue for a very long period of time. We are apparently in such a long-term bear market now. But in determining whether the market is high, we must be vigilant with regard to what data mambers of the financial press are reporting to us, so we can compare "apples" with "apples." When the financial information does not appear to be correct, we, as financial analysts, owe it to the investment community to challenge such information. That is what I have concluded from my personal "odyssey" in the investment world.
After three years of the DJIA and the S&P 500 closing below their previous year-end figures, the market finally closed higher at the end of 2003. But the P/E ratio is still high for both indices.
Does anyone see any icebergs?
Henry V. Janoski, MBA, CFA, CSA is a 1955 graduate 'magna cum laude" of Yale University and a member of Phi Beta Kappa. He received his MBA in finance and banking from the Wharton Graduate Business School of the University of Pennsylvania in 1960 and holds the professional designations of Chartered Financial Analyst (CFA) and Certified Senior Advisor (CSA). As a registered investment advisor representative with the title of Senior Investment Officer, he is located in Scranton, PA. His biography is listed in "Who's Who in Finance and Industry" and in "Who's Who in America." E-mail address: HJanoski@aol.com
Thursday, February 28, 2008
INVESTING IN THE STOCK MARKET - WHEN TO!
Is really not as important as to how you invest in the stock market. And how you invest in the stock market should take into consideration what goals you are setting for that stock market investment.
For example, are you investing for capital appreciation or for income through dividend paying stocks? Or is the investment in the stock market for the combination of both capital appreciation and dividend income?
Are you investing through a Mutual fund(s) or selecting your own individual stocks?
Do you invest with a lump-sum dollar amount or dollar-cost average into your stock or Mutual fund positions (buying the same stock or Mutual fund at different prices over the years)?
Is your investment dollar spread too thin and are all of those dollars working for your ROI (return on investment)?
Do you pay commission fees to purchase a stock?
Do you pay load fees in your Mutual fund(s)? How much does your Mutual fund(s) charge you for management, operating and marketing fees (they are called 'hidden fees')?
'How' you invest in the stock market is more important than 'when' you invest in the stock market and 'how' you invest will determine your ROI.
When you invest in the stock market is after you devise a how-to plan that takes into consideration all of the factors above. Quite frankly, every cent of your investor dollar should benefit you and your family and no one else.
It is my opinion that all stock purchases should be made without commission fees (which is possible). That the investment in all stocks should be a long-term investment, and that every stock purchased should have a history of raising their dividend every year. And all dividends should be reinvested back into the company's shares (also commission free), until retirement.
By purchasing those companies that have a long-term history of raising their dividend each year (for example, Comerica ? 35 years, Proctor and Gamble ? 47 years, BB&T ? 32 years, GE ? 28 years, Atmos Energy - 17 years (they also provide a 3% discount on all shares purchased through dividend reinvestments), the 'HOW' you invest becomes automatic- you dollar-cost average into your holdings through the dividends provided by the companies every quarter.
The dividend is the one factor a company cannot 'fudge'.
The money has to be there to pay the shareholder. If a company can raise their dividend every year, the company MUST be doing something right! When a company has a long history of raising their dividend every year you in a sense eliminate risk, since a lower stock price for that company just means a higher dividend yield. If, for example, a stock purchased at $50.00 a share drops to $36.00 a share, the income provided by the dividend income accelerates, and your dividend reinvestment provides you a better dividend 'bang for your buck'.
There have been many up and downs in the stock market these past 47 years (I know, I've been in almost 40 of them) ? yet Proctor and Gamble has never failed to raise their dividend during those past 47 years.
Below is an example of two types of investors that have $10,000 to invest in the stock market. One is a lump-sum investor, the other a dollar-cost averaging investor. One investor doesn't care about dividends, the dollar-cost averaging investor does.
Each investor took a different 'HOW' to invest and both investors had the same 'WHEN' when they invested. Let's say they invested at the same time, each stock purchased at $50 dollars a share and every quarter the stock dropped $2.00 a share, till the stocks hit a bottom of $36.00, and then recovers back to $50.00.
The lump-sum investor bought the fictitious company ABC, which does not pay a dividend, and the dollar-cost averaging investor purchased the fictitious company XYZ, which pays a quarterly dividend of 50 cents a share (a 4.0% yearly dividend yield), and the company had a history of raising their dividend every March for the past 41 consecutive years. Both purchases were made in January.
The lump sum investor bought 200 shares of ABC at $50.00 a share, watched the stock drop to $36.00, then recover back to $50.00 and when all was said and done ended up right where he started with 200 shares of ABC worth $10,000.
The dollar-cost averaging investor purchased 100 shares of XYZ in January for $5,000.00, (the stock paying a quarterly 50 cent a share dividend for a 4.0 percent yearly dividend yield), and purchased $1,000.00 worth of more shares every quarter for the next 5 quarters. Each quarter the dividend from the company was also reinvested into more shares of stock. Each March the company raised its dividend 2 cents a share, marking 45 consecutive years of rising dividends.
All purchases were commission free.
January, 100 shares of XYZ @ 50.00 a share = $5,000
Date: Stock Price: Div. Purchases: Share Purchases:
March $48.00 @.52 = 1.083 $1,000 = 20.83 shares
June $46.00 @.52 = 1.378 $1,000 = 21.74 shares
Sept $44.00 @.52 = 1.714 $1,000 = 22.72 shares Dec. $42.00 @.52 = 2.098 $1,000 = 23.81 shares March $40.00 @.54 = 2.098 $1,000 = 25.00 shares
June $38.00 @.54 = 2.637 - 0 - Sept $36.00 @.54 = 3.169 - 0 - Dec. $38.00 @.54 = 3.393 - 0 - March $40.00 @.56 = 3.260 - 0 - June $42.00 @.56 = 3.194 - 0 - Sept $44.00 @.56 = 3.045 - 0 - Dec. $48.00 @.56 = 2.827 - 0 - March $50.00 @.58 = 2.843 - 0 -
The dollar-cost averaging investor now owns 247.953 shares of XYZ. The value at $50.00 a share = $12,397.65.
So, the lump-sum investor ends up right where he started, 200 shares of ABC worth $10,000, and the dollar-cost averaging investor ends up owning 247.953 shares of XYZ worth $12,397.65, along with the dividend income generated from owning those shares. Both had the same 'when' when they invested.
The dividend yield at 58 cents a quarter (.58 divided by $50.00 x 4 x 100 =), a 4.64% yearly dividend yield. Every quarter every dividend received from the company was higher than the previous dividend, no matter what the stock price was at the end of the quarter.
The dollar-cost averaging investor is receiving a dividend for the next quarter from XYZ (no matter what the stock price happens to be) of .58 X 247.953 shares = $143.81, and the next quarter (and every quarter thereafter) the dividend would be even higher if the company, at least, maintained their dividend.
If XYZ repeated the same performance history ($50.00 down to $36.00, back up to $50.00) for the next 3 years, and ABC did the same - the HOW you invest in the stock market makes all the difference in the world.
---
You have permission to this article either electronically or in print as long as the author bylines are included, with a live link, and the article is not changed in any way, (typos excluded). Please provide a courtesy e-mail to: charles@thestockopolyplan.com telling where the article was published.
Charles M. O'Melia is an individual investor with almost 40 years of experience and passion for the stock market. Author of the book 'The Stockopoly Plan', published by American-Book Publishing. For more excerpts from The Stockopoly Plan, please visit http://www.thestockopolyplan.com
For example, are you investing for capital appreciation or for income through dividend paying stocks? Or is the investment in the stock market for the combination of both capital appreciation and dividend income?
Are you investing through a Mutual fund(s) or selecting your own individual stocks?
Do you invest with a lump-sum dollar amount or dollar-cost average into your stock or Mutual fund positions (buying the same stock or Mutual fund at different prices over the years)?
Is your investment dollar spread too thin and are all of those dollars working for your ROI (return on investment)?
Do you pay commission fees to purchase a stock?
Do you pay load fees in your Mutual fund(s)? How much does your Mutual fund(s) charge you for management, operating and marketing fees (they are called 'hidden fees')?
'How' you invest in the stock market is more important than 'when' you invest in the stock market and 'how' you invest will determine your ROI.
When you invest in the stock market is after you devise a how-to plan that takes into consideration all of the factors above. Quite frankly, every cent of your investor dollar should benefit you and your family and no one else.
It is my opinion that all stock purchases should be made without commission fees (which is possible). That the investment in all stocks should be a long-term investment, and that every stock purchased should have a history of raising their dividend every year. And all dividends should be reinvested back into the company's shares (also commission free), until retirement.
By purchasing those companies that have a long-term history of raising their dividend each year (for example, Comerica ? 35 years, Proctor and Gamble ? 47 years, BB&T ? 32 years, GE ? 28 years, Atmos Energy - 17 years (they also provide a 3% discount on all shares purchased through dividend reinvestments), the 'HOW' you invest becomes automatic- you dollar-cost average into your holdings through the dividends provided by the companies every quarter.
The dividend is the one factor a company cannot 'fudge'.
The money has to be there to pay the shareholder. If a company can raise their dividend every year, the company MUST be doing something right! When a company has a long history of raising their dividend every year you in a sense eliminate risk, since a lower stock price for that company just means a higher dividend yield. If, for example, a stock purchased at $50.00 a share drops to $36.00 a share, the income provided by the dividend income accelerates, and your dividend reinvestment provides you a better dividend 'bang for your buck'.
There have been many up and downs in the stock market these past 47 years (I know, I've been in almost 40 of them) ? yet Proctor and Gamble has never failed to raise their dividend during those past 47 years.
Below is an example of two types of investors that have $10,000 to invest in the stock market. One is a lump-sum investor, the other a dollar-cost averaging investor. One investor doesn't care about dividends, the dollar-cost averaging investor does.
Each investor took a different 'HOW' to invest and both investors had the same 'WHEN' when they invested. Let's say they invested at the same time, each stock purchased at $50 dollars a share and every quarter the stock dropped $2.00 a share, till the stocks hit a bottom of $36.00, and then recovers back to $50.00.
The lump-sum investor bought the fictitious company ABC, which does not pay a dividend, and the dollar-cost averaging investor purchased the fictitious company XYZ, which pays a quarterly dividend of 50 cents a share (a 4.0% yearly dividend yield), and the company had a history of raising their dividend every March for the past 41 consecutive years. Both purchases were made in January.
The lump sum investor bought 200 shares of ABC at $50.00 a share, watched the stock drop to $36.00, then recover back to $50.00 and when all was said and done ended up right where he started with 200 shares of ABC worth $10,000.
The dollar-cost averaging investor purchased 100 shares of XYZ in January for $5,000.00, (the stock paying a quarterly 50 cent a share dividend for a 4.0 percent yearly dividend yield), and purchased $1,000.00 worth of more shares every quarter for the next 5 quarters. Each quarter the dividend from the company was also reinvested into more shares of stock. Each March the company raised its dividend 2 cents a share, marking 45 consecutive years of rising dividends.
All purchases were commission free.
January, 100 shares of XYZ @ 50.00 a share = $5,000
Date: Stock Price: Div. Purchases: Share Purchases:
March $48.00 @.52 = 1.083 $1,000 = 20.83 shares
June $46.00 @.52 = 1.378 $1,000 = 21.74 shares
Sept $44.00 @.52 = 1.714 $1,000 = 22.72 shares Dec. $42.00 @.52 = 2.098 $1,000 = 23.81 shares March $40.00 @.54 = 2.098 $1,000 = 25.00 shares
June $38.00 @.54 = 2.637 - 0 - Sept $36.00 @.54 = 3.169 - 0 - Dec. $38.00 @.54 = 3.393 - 0 - March $40.00 @.56 = 3.260 - 0 - June $42.00 @.56 = 3.194 - 0 - Sept $44.00 @.56 = 3.045 - 0 - Dec. $48.00 @.56 = 2.827 - 0 - March $50.00 @.58 = 2.843 - 0 -
The dollar-cost averaging investor now owns 247.953 shares of XYZ. The value at $50.00 a share = $12,397.65.
So, the lump-sum investor ends up right where he started, 200 shares of ABC worth $10,000, and the dollar-cost averaging investor ends up owning 247.953 shares of XYZ worth $12,397.65, along with the dividend income generated from owning those shares. Both had the same 'when' when they invested.
The dividend yield at 58 cents a quarter (.58 divided by $50.00 x 4 x 100 =), a 4.64% yearly dividend yield. Every quarter every dividend received from the company was higher than the previous dividend, no matter what the stock price was at the end of the quarter.
The dollar-cost averaging investor is receiving a dividend for the next quarter from XYZ (no matter what the stock price happens to be) of .58 X 247.953 shares = $143.81, and the next quarter (and every quarter thereafter) the dividend would be even higher if the company, at least, maintained their dividend.
If XYZ repeated the same performance history ($50.00 down to $36.00, back up to $50.00) for the next 3 years, and ABC did the same - the HOW you invest in the stock market makes all the difference in the world.
---
You have permission to this article either electronically or in print as long as the author bylines are included, with a live link, and the article is not changed in any way, (typos excluded). Please provide a courtesy e-mail to: charles@thestockopolyplan.com telling where the article was published.
Charles M. O'Melia is an individual investor with almost 40 years of experience and passion for the stock market. Author of the book 'The Stockopoly Plan', published by American-Book Publishing. For more excerpts from The Stockopoly Plan, please visit http://www.thestockopolyplan.com
VALUE INVESTING
By definition, value investing is the process of selecting stocks that trade for less than their intrinsic value. A value investor typically selects stocks with lower than average price-to-book or price-to-earning ratios. Of course, it is not nearly this simple. Value investing is the corner stone of long-term growth. Those who practice it survive the ups and downs of the market and are more likely to emerge wealthy than those who ride the market, in principle, due to the higher quality of the companies falling under the prerequisites of the value investor. Value investing is essentially concerned with getting the most profit at the lowest cost. The basis of value is profit. Value investing is an investment style which favors good stocks at great prices over great stocks at good prices. Value investor extraordinaire Warren Buffett has used this style to become a billionaire.
It's important to keep in mind that value investing is not concerned with how much the price of a stock has risen or fallen necessarily, but rather what is the "intrinsic" or inherent value of the stock, and is it currently trading below that price, i.e. at a discount to it's intrinsic value. The important point here is that when looking at stocks that are trading at or above their intrinsic value, the only hope for gaining value is based on future events, since the stock price already represents what the company is worth. However, when dealing with stocks that are undervalued, or available at a discount, unforeseen events are unimportant in that without any new earnings or additional profits, the shares are already "poised" to return to that inherent value which they have.
The question now, of course, is "why would stock prices not always reflect the true value of the company and the intrinsic value of its shares?" In short, value investors believe that share prices are frequently wrong as indicators of the underlying value of the company and its shares. The efficient market theory suggests that share prices always reflect all available information about a company, and value investors refute this with the idea that investment opportunities are created by disagreements between the actual stock prices, and the calculated intrinsic value of those stocks.
Finding Value Stocks
Value investing is based on the answers to two simple questions:
1. What is the actual value of this company?
2. Can its shares be purchased for less than the actual (intrinsic) value?
Clearly, the important point here is, "how is the intrinsic value accurately determined?" An important point is that companies may be undervalued and overvalued regardless of what the overall markets are doing. Every investor should be aware of and prepared for the inherent market volatility, and the simple fact that stock prices will fluctuate, sometimes quite significantly.
Benjamin Graham has often said that if investors cannot be prepared to accept a 50% decline in value without becoming riddled with panic, then investing may not be for them...or rather, successful investing, as it often takes significant losses in a particular security before gains are made, due to the idea that value investors do not try to time the market, and are focused on the underlying fundamentals of the companies. Furthermore, the quality of the companies targeted by the value investors' screening methods should be, over the long term, less volatile and susceptible to market "panic" than the average stock.
This is also a two way road of sorts. On one hand, there is no sense in worrying about depressions, upturns, and recoveries due to the underlying quality of the value investments. On the other hand, investments should only be made in companies which can flourish and do well in any market environment. Doing solid investment research and making equally solid investment decisions will take investors much further than trying to forecast the markets.
How Many Different Stocks?
In terms of diversification, there are many discrepancies over exactly how many different stocks a solid portfolio should be made up of. My personal view is that there should not be as many stock as normally make up a mutual fund. Many will disagree with this, but what it's worth, I think that owning a portfolio of 100, 200, or even more companies not only serves to limit risk, but it really limits the possibility for reward as well. Also, as Warren Buffett has said many times, the more companies you own, the less you know about each one.
As I write this, there are 42 stocks in our recommended portfolio. This number may very well grow in the coming months, as it may decrease in number, but one thing to keep in mind is, out of the thousands of companies available for purchase, only a very small percentage meet the stringent requirements of the diligent value investor. This is both a blessing and a curse. Very often, there is simply nothing to buy, and this is fine. The trap to avoid falling into is to lower your requirements for a stock when there simply isn't anything meeting the normal requirements. This is how many an investor has fallen into making poor investment decisions, putting money into companies not really adequate for their respective portfolio, and it will certainly have a long term effect on gains.
David Pakman has been writing about politics and investing for years now, and runs the websites www.heartheissues.com and http://pakman.thevividedge.com
It's important to keep in mind that value investing is not concerned with how much the price of a stock has risen or fallen necessarily, but rather what is the "intrinsic" or inherent value of the stock, and is it currently trading below that price, i.e. at a discount to it's intrinsic value. The important point here is that when looking at stocks that are trading at or above their intrinsic value, the only hope for gaining value is based on future events, since the stock price already represents what the company is worth. However, when dealing with stocks that are undervalued, or available at a discount, unforeseen events are unimportant in that without any new earnings or additional profits, the shares are already "poised" to return to that inherent value which they have.
The question now, of course, is "why would stock prices not always reflect the true value of the company and the intrinsic value of its shares?" In short, value investors believe that share prices are frequently wrong as indicators of the underlying value of the company and its shares. The efficient market theory suggests that share prices always reflect all available information about a company, and value investors refute this with the idea that investment opportunities are created by disagreements between the actual stock prices, and the calculated intrinsic value of those stocks.
Finding Value Stocks
Value investing is based on the answers to two simple questions:
1. What is the actual value of this company?
2. Can its shares be purchased for less than the actual (intrinsic) value?
Clearly, the important point here is, "how is the intrinsic value accurately determined?" An important point is that companies may be undervalued and overvalued regardless of what the overall markets are doing. Every investor should be aware of and prepared for the inherent market volatility, and the simple fact that stock prices will fluctuate, sometimes quite significantly.
Benjamin Graham has often said that if investors cannot be prepared to accept a 50% decline in value without becoming riddled with panic, then investing may not be for them...or rather, successful investing, as it often takes significant losses in a particular security before gains are made, due to the idea that value investors do not try to time the market, and are focused on the underlying fundamentals of the companies. Furthermore, the quality of the companies targeted by the value investors' screening methods should be, over the long term, less volatile and susceptible to market "panic" than the average stock.
This is also a two way road of sorts. On one hand, there is no sense in worrying about depressions, upturns, and recoveries due to the underlying quality of the value investments. On the other hand, investments should only be made in companies which can flourish and do well in any market environment. Doing solid investment research and making equally solid investment decisions will take investors much further than trying to forecast the markets.
How Many Different Stocks?
In terms of diversification, there are many discrepancies over exactly how many different stocks a solid portfolio should be made up of. My personal view is that there should not be as many stock as normally make up a mutual fund. Many will disagree with this, but what it's worth, I think that owning a portfolio of 100, 200, or even more companies not only serves to limit risk, but it really limits the possibility for reward as well. Also, as Warren Buffett has said many times, the more companies you own, the less you know about each one.
As I write this, there are 42 stocks in our recommended portfolio. This number may very well grow in the coming months, as it may decrease in number, but one thing to keep in mind is, out of the thousands of companies available for purchase, only a very small percentage meet the stringent requirements of the diligent value investor. This is both a blessing and a curse. Very often, there is simply nothing to buy, and this is fine. The trap to avoid falling into is to lower your requirements for a stock when there simply isn't anything meeting the normal requirements. This is how many an investor has fallen into making poor investment decisions, putting money into companies not really adequate for their respective portfolio, and it will certainly have a long term effect on gains.
David Pakman has been writing about politics and investing for years now, and runs the websites www.heartheissues.com and http://pakman.thevividedge.com
EVALUATING A MONEY MANAGER
Scams and frauds are designed to take your money through false promises and phony claims. Money management is supposedly designed to increase your net worth. Sometimes these two worlds meet and the results are not in your favor, i.e., you have a considerable decrease in net worth.
The information in this article won't keep future money managers honest but it will help you find the one who is right for your situation. There are four criteria you must consider before you give your money to anyone to manage.
1) Philosophy-- This is the thought theology used by the money manager to make your money grow. In other words, does (s)he focus on stocks, options, mutual funds, annuities, a blend of investment vehicles, etc.? Does this philosophy coincide with your risk tolerance? If stocks are too risky, a manager concentrating in that arena isn't for you. The philosophy also points you to their performance.
2) Performance-- We all know the markets are not stagnant. They go up, they go down. No investment manager can predict the market with absolute certainty. But, they should perform well, or even above average, in their specialty. For example, a stock focused money manager in today's market environment should have performance numbers that would make even Warren Buffet take notice. You want as long a performance record as possbile. To be fair, one market cycle should give you a decent indication of the manager's performance in his/her area(s) of expertise.
3) Process-- This is the means the manager uses to select securities for the portfolios. For example, does (s)he relyonly on in house research or does (s)he incorporate researchfrom outside sources? If so, who are they and on what frequency are they used?
4) Personnel-- Besides wanting to know the manager's experience, you'd be wise to learn all you could about the folks working in the office. Who actually manages the portfolio? His/her experience? How long has (s)he been in business? Who will manage your account when (s)he is out of the office, on vacation, on business?
Some people would say cost is one of the criteria. I say it is, but to a lesser degree. In over 30 years in this business, I can guarantee that paying the highest commission did not necessarily result in receiving the best advice. Paying the lowest commission did not necessarily result in receiving the worst advice.
Cost comes in the form of fees and commissions. ALL money managers charge. Cost, initially, should not be in your criteria because it often becomes the ONLY determining factor. That will skewer your thinking and could result in not having awinning team working for you. Make the above four parameters yourprimary criteria and cost will take care of itself.
How? You will be quoted a charge. If you are not comfortable with that price, negotiate. All fees and commissions are negotiable. If the manager refuses to negotiate, then and only then, make cost a member of the criteria team.
This article won't solve all of the money management problems or costs associated therewith. However, it'll at least start you thinking in the right direction and keepyour money in your pocket until you are ready to hand it over.
The information in this article won't keep future money managers honest but it will help you find the one who is right for your situation. There are four criteria you must consider before you give your money to anyone to manage.
1) Philosophy-- This is the thought theology used by the money manager to make your money grow. In other words, does (s)he focus on stocks, options, mutual funds, annuities, a blend of investment vehicles, etc.? Does this philosophy coincide with your risk tolerance? If stocks are too risky, a manager concentrating in that arena isn't for you. The philosophy also points you to their performance.
2) Performance-- We all know the markets are not stagnant. They go up, they go down. No investment manager can predict the market with absolute certainty. But, they should perform well, or even above average, in their specialty. For example, a stock focused money manager in today's market environment should have performance numbers that would make even Warren Buffet take notice. You want as long a performance record as possbile. To be fair, one market cycle should give you a decent indication of the manager's performance in his/her area(s) of expertise.
3) Process-- This is the means the manager uses to select securities for the portfolios. For example, does (s)he relyonly on in house research or does (s)he incorporate researchfrom outside sources? If so, who are they and on what frequency are they used?
4) Personnel-- Besides wanting to know the manager's experience, you'd be wise to learn all you could about the folks working in the office. Who actually manages the portfolio? His/her experience? How long has (s)he been in business? Who will manage your account when (s)he is out of the office, on vacation, on business?
Some people would say cost is one of the criteria. I say it is, but to a lesser degree. In over 30 years in this business, I can guarantee that paying the highest commission did not necessarily result in receiving the best advice. Paying the lowest commission did not necessarily result in receiving the worst advice.
Cost comes in the form of fees and commissions. ALL money managers charge. Cost, initially, should not be in your criteria because it often becomes the ONLY determining factor. That will skewer your thinking and could result in not having awinning team working for you. Make the above four parameters yourprimary criteria and cost will take care of itself.
How? You will be quoted a charge. If you are not comfortable with that price, negotiate. All fees and commissions are negotiable. If the manager refuses to negotiate, then and only then, make cost a member of the criteria team.
This article won't solve all of the money management problems or costs associated therewith. However, it'll at least start you thinking in the right direction and keepyour money in your pocket until you are ready to hand it over.
Subscribe to:
Comments (Atom)
