Archives for February 2012

Warren Buffett’s Current Thoughts on Stocks, Bonds, and Gold

You should take a few minutes today to read the latest thoughts from one of the greatest investors ever, Warren Buffett. In an article he wrote for today’s issue of Fortune he offers great insight into why stocks beat gold and bonds. You are wise to read the whole thing, but I’ll leave you with a few thoughts to ponder.

Buffett On Bonds:

Today, a wry comment that Wall Streeter Shelby Cullom Davis made long ago seems apt: “Bonds promoted as offering risk-free returns are now priced to deliver return-free risk.”

Buffett on Gold:

Gold, however, has two significant shortcomings, being neither of much use nor procreative. True, gold has some industrial and decorative utility, but the demand for these purposes is both limited and incapable of soaking up new production. Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end.

Today the world’s gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce — gold’s price as I write this — its value would be about $9.6 trillion. Call this cube pile A.

Let’s now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world’s most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?

A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops — and will continue to produce that valuable bounty, whatever the currency may be. Exxon Mobil (XOM) will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons). The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond.

Buffett on Stocks:

Berkshire’s goal will be to increase its ownership of first-class businesses. Our first choice will be to own them in their entirety — but we will also be owners by way of holding sizable amounts of marketable stocks. I believe that over any extended period of time this category of investing will prove to be the runaway winner among the three we’ve examined. More important, it will be by far the safest.

Our View

Our firm is aligned with Warren Buffett. We also view bonds as being priced to deliver return-free risk. Why? Because yields today are less than the expected rate of inflation.

We too view Gold as unproductive and hold only a small amount for some clients as a hedge. Read Tony’s blog post for more thoughts on Gold.

Finally, if you are a regular reader of my emails then you already know how we feel about stocks today. There are many great businesses trading at prices that we believe to be compelling. The market as a whole is trading well below its historical valuation measures. It’s a good time to be buying stocks if you are a long term investor. Don’t let fear and uncertainty get in the way of making some smart stock purchases. Focus on high quality businesses with a competitive advantage, strong balance sheets, and growing profits.

Photo by: Fortune Live Media

Gold: To Hold or Not to Hold…That is the Question

Jeremy Grantham, co-founder of GMO a Boston-based asset management firm, is quoted as saying “I own some gold myself as a pure speculation – just enough to mute the irritation of watching gold prices rise.”  The tricky thing with gold is that it is very hard to value.  It has no yield, generates no cash flow, has no earnings power and therefore no “intrinsic value”.  So what is driving gold higher?

Gold seems to be a hedge against general macro uncertainty, fear, and financial instability.  However, gold prices are highly volatile and shouldn’t be expected to always go up even in the face of an economic crisis.  For instance, in 2008, GLD (a gold ETF) fell roughly 25% while equities and other asset classes were getting clobbered.  GLD fell roughly 20% last fall.

While we say that we can’t determine an intrinsic value of gold, it only has value because over the centuries people have believed it has value.  (The same thing can be said of fiat currencies such as the dollar, euro or yen.)  (Note: A ‘fiat currency’ are currencies that governments have declared to be legal tender, despite not being linked to physical reserves).  So it comes down to a question of belief, not fair value.  Can an asset that has appreciated for 11 straight calendar years continue its streak?  If one cannot ascertain whether gold is over- or undervalued, you must simply trust your gut.

As a firm, we own a very small amount of gold in our client portfolios through a couple of different mutual funds.  We’re unwilling to bet large amounts of client’s capital on the belief that gold will go higher.  We’ll stick with what we know…valuations.  Stocks look undervalued, bonds look overvalued, cash is trash.  To the gold pundits, you’ve been right for quite a while, I’d be wary going forward.  Beliefs may change more rapidly than fundamentals.

How To Setup Evernote To Increase Your Productivity As An Investor

Recently I discovered how effective Evernote can be at improving my productivity as an investor. Every investor should use Evernote because it will help you:

  • be more organized and therefore efficient
  • clarify your investment thesis
  • maintain a virtual notebook of research notes that are accessible anywhere on your computer, iPad, or smartphone
  • quickly retrieve statements and tax records related to your accounts.

I have been using Evernote for over a year now. What I really like about it is that I can access my notes and access them anywhere with my iPhone or an iPad. It is also nice to have less paper by storing as much information as I can digitally. If you are new to Evernote I suggest reading Michael Hyatt’s blog posts about Evernote. You will want to start with How to Organize Evernote for Maximum Efficiency. I struggled for awhile trying to figure out the best way to organize my notebooks. After reading this post I decided to follow Michael’s basic structure. Once I got things organized as he recommended I found myself using Evernote daily.

I recently decided to use Evernote to track my investing research and activities. Here’s how to set up Evernote to make you a more productive as an investor:

First, create a new stack called “Investments“. A stack is simply a collection of notebooks. It is a nice way to separate your investing notebooks so they are all in one place.

Next, within your “Investments” stack create the following notebooks:

  • Account Info – In this notebook you can create notes for each account you have. I like to include things like the institution, account type, account number, account type, and contact information.
  • Checklists – This notebook will be used to organize your investing checklists. Every investor should have a checklist of items to review anytime they buy a new stock, mutual fund, etc. You should also have a another checklist of items to go through as you review your investments on an ongoing basis. Your checklist will help you determine when to sell a particular investment. It’s often more difficult to make a decision to sell than it is to buy. A checklist will help you make smart decisions.
  • Inspiration – I use this notebook to store quotes from Warren Buffett and other successful investors. I also use it to clip blog posts that inspire me to be a better investor.
  • Reference – This is the notebook where you will store all of your reference notes and material related to investing. This is a great place to keep book notes, or your “Net Out“, from investing books that you read. I have also created a note with a list of my investing rules and criteria. Basically, you will just want to use this notebook to store any notes you keep on investing that you may want to access later.
  • Research Notes – This notebook is where I accumulate notes on specific investments that I have researched. You should have a note on every stock, mutual fund, or other investment you own. I like to title my notes as follows: “$TICKER – Investment Name – Research Notes”. This allows me to search by ticker or the name of the stock or mutual fund.
  • Statements – Another great thing about Evernote is that you can store your documents right in your notebooks. If you are a premium user, then any scanned document you upload will be fully searchable. The statements notebook is a great place to store electronic statements that you download from your financial institution. It is nice to have a current statement available for quick access anytime you are working on your portfolio. It is also helpful to have your statements handy when meeting with your financial advisor, accountant, or attorney.
  • Tax Records – In this notebook you will store your 1099s. You will also want to store other tax related information you might need later. For example, if you inherited some stock you will need to track the cost basis of that stock in case you ever sell it.

Finally, don’t forget security. If you use Evernote to help manage your investment information it will be critical that you keep your account secure. Use a unique password that is a mix of letters, numbers, and symbols. The longer your password, the harder it is to guess. The basic version of Evernote is free. However, if you upgrade to the premium version ($45/year) you can add a PIN lock to your iOS or Android app for extra security.

Well, this should be enough to start keeping track of your investment activity in Evernote. With these seven notebooks you will find that Evernote can make you a much more productive, and ultimately better, investor. The possibilities are endless. I would love to hear your ideas. How else could investors use Evernote to increase their productivity and ultimately their results?

Market & Economic Update: Stocks & Employment Show Big Gains in January

What a great start to 2012! In fact, we’ve had the best start in 15 years (since 1997). With January already in the books let’s take a look at where we are.

The Stock Market

The S&P 500 rose 4.4% for the best January since it rose 6.1% in 1997.

The S&P 500 is now up over 20% since September 30, 2011.

86% of stocks in the S&P 500 are now trading above their 50-day moving average. This is a high reading but not quite as high as October of last year.

Chart by: Bespoke

So far, last year’s losers are this year’s winners. The 3 sectors that were down in 2011 rank in the top 3 so far this year: Financials, Materials, and Industrials. The 2 best sectors of 2011 are down so far in 2012: Utilities and Consumer Staples.

Volatility has calmed down once again. Through Thursday, the S&P 500 has had only two 1% days for the year, and both were positive. The biggest down day for the year was only -0.57%. This is a nice change from last October when 15 of the 21 trading days were 1% or more moves. Although much of the 2nd half of 2011 seemed very volatile this is still nothing compared to the 50 day stretch in 2008 where the market averaged a daily change of up or down 4.02%. [Source: Bespoke]

Corporate Earnings

We are well into this quarter’s earnings season. One important indicator of how well companies are doing is the “beat rate”. The beat rate tells us how many companies have reported earnings results that “beat” analyst estimates. Through yesterday 60.7% of companies beat earnings estimates.


This morning’s jobs report came in well above expectations. The US economy added 243,000 jobs during January which was 103,000 more than the expected 140,000 jobs. The market reacted very favorably today as this was the biggest beat versus expectations since the December 2009 report. [Source: Bespoke]

The unemployment rate dropped to 8.3%, the lowest level since February 2009.

Today’s report was the best since the start of the recovery, but we’ve still got along way to go. Unemployment is still far above where it should be. Creating more jobs will take time, but the good news is we are moving in the right direction.

Interest Rates

Mortgage rates have fallen to yet another all-time record low. Freddie-Mac reported that a 30-year fixed rate mortgage averaged 3.87% with an average 0.8 point for the week ending February 2, 2012, down from last week when it averaged 3.98%. Last year at this time, the 30-year fixed rate averaged 4.81 percent.  This is the lowest 30 year fixed rate since Freddie Mac started tracking rates in 1971.

February Seasonality [source: Bespoke]

So, what historically happens in the stock market during the month of February?

  • Over the past 100 years the Dow Jones Industrial Average has averaged a 0.09% decline during the month of February. February is one of only two months (also September) that has seen average losses for the Dow over the past 100 years.
  • Over the last 50 years the Dow has been exactly flat on average for the month of February.
  • Over the most recent 20 years the average return during February was a drop of -0.23%.

If you are a stock investor, let’s hope history doesn’t repeat itself this February:)

However, if you believe that history repeats, and you want to trade the February seasonality patterns, here’s what you want to do:

  • overweight these top 3 February seasonality sectors: Materials, Consumer Discretionary, and Energy
  • underweight these bottom 3 February seasonality sectors: Telecommunication Services, Utilities, and Technology