MOODY'S REVIEW
JANUARY 2001
COMMENTARY ON INVESTMENT AND PLANNING ISSUES
ERROLD F. MOODY JR.
MASTER OF SCIENCE IN FINANCIAL PLANNING
LIFE AND DISABILITY INSURANCE ANALYST
REGISTERED INVESTMENT ADVISER
GOING UP: A report by MetLife Mature Market Institute indicates that the average cost of a nursing home stay in the U.S. is $153 a day, or nearly $56,000 a year.
"The penalty for laughing in a courtroom is six months in jail; if it were not for this penalty, the jury would never hear the evidence."
H. L. Mencken
HEALTH (AP) A startling commentary (to some) from Harvard says that if women were to eat sensibly, not smoke, get exercise, keep weight down and only have an occasional drink, they could reduce heart disease by 82%. People don't do this of course- the study of 84,129 nurses showed that only 1% followed the guidelines. I think- and separate comments state- that the same situation exists for men.
But being healthy is not a major real "concern" for most people and few of the suggestions will be taken to heart (there's a pun there- work it out). Obesity has gained 50% over the last 7 years. About 55% of all adults are overweight and 22% are obese. More fast food choices. And people generally don't exercise. We may live longer, but with recent commentary on being much fatter, the level of medical costs will almost assuredly rise as the elderly (particularly the fat ones) look to medicine to make them feel better and live longer as they sit in their comfy chairs watching Wheel of Fortune or how to get a million dollars with Regis. It's for this reason that I think Long Term Care policy premiums will escalate. I don't know if the actuaries have yet identified the problem, but the costs for care should start showing up within the next 10 years.
WOMEN AND SMALL BUSINESSES (US Dept of Labor) "Women-launched businesses are the fastest growing small business sector. In fact, since 1987, the number of women-owned businesses has doubled. Women-owned companies are growing at twice the rate of the overall business growth rate, with business starts by Hispanic women leading the pack. Hispanic females are launching businesses at triple the overall U.S. start-up growth rate. Currently, some 40% of America's closely-held businesses are female-owned. At the same time, 60% of women-owned businesses are operated from the home."
I personally think the Hispanic market could be unlimited. Unfortunately, Hispanics are not inclined for higher education and they may miss out on untold opportunities in the next century. However, if someone can get them focused on college educations, they could be the leader both of and in the U.S. by the next 50 to 75 years.
AIDs infects nearly 6 million
people worldwide each year
"I have enough money to last me the rest of my life, unless I buy something."
Jackie Mason
NBC AND BAD PLANNERS. The nightly news had a lengthy broadcast about the people being defrauded by unethical financial planners. The "little old lady" talked about how she saw the adviser on TV, how the adviser befriended her and had her sign a contract offering 30% returns annually. This women was not senile- she fell for the old line of "trust" and annual returns that would exceed what God could get. The SEC shut the adviser down and indicated that she owed clients millions of dollars.
Want to avoid all of that? Simple. There are advisers who do NOT take your money- no discretionary accounts. It's the only way I work and I think it truly is the best way to keep everything at the most professional level. Of course the reason it is not done more often is that there is more work demanded by both the adviser and the client. Neither usually likes that.
WOMEN (USA Today) Long time readers know my statements that women may control the world by 3000- assuming men don't blow it up by then. There are many reasons but one that is most noted is occurring in the U.S. Women are getting more degrees now than men. "Experts say non-degree sports stars and high-tech pioneers are helping some men to feel school is uncool, leading to a steady decline in the number of male college students on U.S. campuses. Women, who in 1970 accounted for less than 45% of college students, have slowly reversed the numbers. Now, it's men who constitute the minority. Women earned about 642,300 bachelor's degrees in 1996, while men earned just under 522,500 The statistics apply across all geographic, economic, ethnic and racial lines."
EXERCISE- If you have been inactive, you don't start running five miles right off the bat. Per the Journal of the American Medical Association, "People who are extremely inactive are more than 30 times more likely to have a heart attack during exertion than at any other time. Those who are just plain inactive are 21 times more likely. "If you don't get much exercise and you're middle-aged with a lot of risk factors, you ought to be pretty careful about picking up that snow shovel," said the researcher."
They are not suggesting you don't exercise since the long term benefits are enormous.
SOCIAL SECURITY: Planners said 44% of their younger clients (ages 20 to 30) believe they will receive similar benefits from Social Security when it's their time to retire. On the more skeptical side, 20% of clients think they will receive a reduced benefit and 35% expect nearly no benefit from the government.
CANCER: Approximately 131,000 men and women in the U.S. will be diagnosed this year with colon cancer
CONSUMER REPORTS MORONS- Consumer Reports has a $29.95 publication "How to Plan for a Secure Retirement" and promises you will learn "how to protect your assets without paying for costly long-term-care insurance" and "how to qualify for Medicaid without impoverishing your spouse."
This is a breach of any fiduciary responsibility since the LAST thing any intelligent being would want to do is die in a Medicaid ward. If you can't afford long term care policies, Medicaid will cover. But recognize that Medicaid pays only about 80% of private pay. You tend to get fewer staff and at lower salary and with less training. You never want to die in a Medicaid ward. NEVER!
FUND MANAGEMENT: A research director at fund tracker Morningstar says the actively managed funds are beginning to show up on his cultural radar as a "marketing scam for suckers." Additionally, a noted financial planner stated, "As much as we would like to believe that a manager with good brains, energy, and talent can always beat the system, we're no longer persuaded--at least in the large-cap domestic market--that after you factor in trading costs and fees, anyone can do it consistently."
So, does that mean all managed funds are out and you always use index funds. Not quite as best referenced by the Morgan Stanley index of East Asia. It includes Japan- rightfully so- but the long recession in Japan severely eroded returns from the other included countries. Admittedly, Japan will come back economically. But the question begs, WHEN???
SUBSTANTIAL : There are innumerable terms used in LTC policies. Here is some commentary on the use of the term "substantial". A conservative interpretation would mean personal, one-on-one, "hands-on" help from another human being. This wording may not allow benefits until much later on, when one is "on their last legs." A more desirable interpretation of "substantial" includes "directional" assistance ("Mr. Smith, now it's time to eat. Pick up your spoon now."). Another desirable phrase is "stand-by' assistance (which means that a human being is nearby to monitor, observe and help if needed).
DEPRESSION: 55.3% of all female suicides are committed in China.
WOMEN AND PENSIONS (Department of Labor) Median annual pension income for women- $3,000. For men- $7,800
Right now I'm having amnesia and deja vu at the same time.
I think I've forgotten this
before.
DID YOU EAT TOO MUCH THIS HOLIDAY?- Overweight women who lost as little as five pounds handled daily activities more easily and had fewer aches and pains (Journal of the American Medical Association). Gaining as little as five pounds had the reverse effect in normal-weight and overweight women.
THIS WON'T GET CHEAPER- (AARP) Despite the help Medicare coverage provides, older Americans will spend, on average, more than $2,400 in out-of-pocket expenses for health care this year. And if the Medicare budget does not increase and to stop more HMO's leave the mainstream, the cost by the elderly could go up another $1,000 if they buy a Medicare supplemental policy to offset the additional costs of Medicare's deductible, 20% co- pay, medications, etc.
MORE HEALTH CARE PROBLEMS: Health Insurance Association of America (HIAA)."Their report predicts the total number of Americans without health insurance by 2008 will grow to 55 million - more than 22 percent of the non-elderly population - without government action. The number of non-elderly Americans with employer-sponsored health insurance rose in 1998 to more than 157 million Americans, up from approximately 152 million Americans in 1997. But from 1997 to 1998, the percentage of women in every adult age group who are uninsured rose faster than the corresponding rate for men. Furthermore, it shows the percentage of "non-poor" Americans (people who earn more than twice the federal poverty level of $33,400 for a family of four) has increased from about 40 percent of the uninsured in 1994 to nearly 46 percent of the uninsured in 1998. Poor Americans continue to make up the largest percentage of the uninsured."
YOU THOUGHT AIDS WAS BAD? Hepatitis C will kill more people annually than AIDs by 2010. (National Center for Disease Control) It is a virus that causes liver damage, liver cancer and chirrohosis.
ANNUITIES IN RETIREMENT PLANS. An attorney has indicated that about 99% of all annuities sold direct to consumers (without an agent) are outside of qualified plans. But 50% of agents sales are to individuals in qualified plans. How stupid can people get? Apparently about $98 billion since a record $98 billion of variable annuities were sold in 1998.
NOT VERY BRIGHT: (Education Trust) "Most high school diplomas aren't preparing children for college or the work force. Employers and college officials alike say graduating students don't even have to learn basic algebra or other lessons they need to be successful.
COMPANY VALUATION: (Pricewaterhouse Coopers) A survey of various companies being sold between 1993 and 1998 found that "arms-length negotiations determined the price in 41% of the sales. Independent appraisals were the second most widely used technique. They accounted for 35% of the business transfers in the PwC study. Formulas embedded in pre-existing buy-sell agreements were used to determine the asset values in just 14% of the cases and a public offering established the company's value in 8% of the cases." Just remember that arm's length negotiation means exactly that- independent and thorough. If the valuation is not based on some viable formula, the IRS may contest.
ANOTHER ETHICAL GUIDELINE BITES THE DUST. "Nearly half the partners at accounting giant PricewaterhouseCoopers LLP reported having violated rules prohibiting them from owning stock in companies they audit, and many more such lapses went unreported." Many were rationalizing that "there were "too many rules already." While some have pushed for rules changes, others seem to have concluded that the existing rules were more in the way of suggestions than requirements. The regulators made the rules, and the accountants promised to obey them, but no one seems to have checked to be sure that was happening."
Long time readers probably know what is coming- my continued focus on the violations of state laws and ethics by 99%+ of B/D's who are involved in financial planning and literally all the financial planning firms. The IAFP, Board of Standards, ICFP, AICPA , NAPFA and literally all the firms know the law but just don't want to obey it. Why? Take a look at the further commentary from the NY Times
"At the world's largest accounting firm, PricewaterhouseCoopers, a report released by the S.E.C. on Thursday concluded that the vast majority of partners had violated the rules. Partners pleaded that the rules were too complicated and said they had not understood them."
Give me a break. Here are highly educated people (supposedly) who could not figure out the rules/laws and how they should be applied? Get real. If they had any problems, all they had to do is ask. But they preferred to react to issues by utilizing a well known "method" in our society. It's called moral egoism. You can justify any action as long as it is in your best interest- or that of your family, company, neighborhood, etc.
Next- "The most important issue for the accounting profession, particularly the Big Five that audit most large public companies, should be the preservation of a reputation that investors are willing to rely on. That reputation is coming under attack, particularly with the disclosure that most senior executives of PricewaterhouseCoopers violated the rules."
But the reputation is only sullied if actions are actually taken against the firms. As regards the planning entities and firms- the Department of Insurance doesn't have the money (or the guts) to pursue the issue. And the ethics clauses by all the organizations are words only. As an attorney for the Board of Standards stated directly to me, The board will only enforce an ethical violation when preceded by a legal one." That IS a good business and liability decision- but it is not an ethical one.
EAT YOUR VEGGIES: (New England Journal of Medicine) American and Northern European men with high blood pressure are three times more likely to die of a heart attack than men with the same blood pressure from Japan or the Mediterranean coast of Europe. Although genetics may explain some of the difference, diet also plays an important part.
Caregivers also must practice good self care. Professionals are notoriously poor about caring for themselves. They work long days, don't take vacations or sick leave and are often overstressed. Particularly when working with older people, it is important for providers to understand their own feelings about aging and dying before they can help their own clients.
Bonnie Genevay
BREASTS AND PROSTATE: (American
Cancer Society) A woman's chance of developing invasive breast cancer from
birth to death is 12.56% while a man's risk of invasive prostate cancer is
15.91%.
My grandfather once told me that there are two kinds of people: those who do the work and those who take the credit. He told me to try to be in the first group; there was less competition there.
Indira Gandhi
TOTAL OF TAX INCREASES OR DECREASES ENACTED BY THE STATES SINCE FISCAL 1990:
Fiscal year Change (in billions)
1990 +$4.9
1991 +$10.3
1992 +$15.0
1993 +$3.0
1994 +$3.0
1995 -$2.6
1996 -$3.8
1997 -$4.1
1998 -$4.6
1999 -$7.0
2000 -$5.2
Source: National Association of State Budget Officers
VARIABLE ANNUITIES: (Insure.com) Yes, sometimes these can work. But they have a deservedly bad name in the industry due to unnecessary sales and continue to blemish the insurance industry overall when sold improperly. "Prudential Securities Inc., AEGON USA Inc., and several AEGON USA subsidiaries have been sued for inappropriately pitching variable annuities for their tax-deferral feature to investors to fund retirement plans that are already tax-deferred. The suit contends that consumers buy annuities for their tax-deferral feature, but end up incurring other fees and costs, including mortality and expense fees and agent commissions, that weren't fully disclosed to them."
You often wonder how Pru could continue to screw up after $2 billion+ in fines over the last few years. Easy- the commissions are lucrative and usually several times what a mutual fund load would pay.
INSURANCE: (Tax Management) "Estate attorneys often deal with life insurance and should take caution to avoid professional liability. Documentation should be maintained on the information provided to the client, and when using illustrations provided by insurance carriers, attorney should be careful to inform clients that the illustrations are not guarantees. It may behoove an attorney to seek outside professional advice when experience in evaluating different life insurance products is lacking. If outside advice is sought, the client should be fully informed in writing the outside professionals name and the responsibilities of all parties involved. The suggested several recommendations":
1. Advise the insurance agent to provide several price quotations from different companies
2. Obtain an outside consultant to review all the current and future insurance policies in a trust
3. Find an insurer with a good reputation and top rating.
4. Ask agents for an inforce ledger of all policies annually both at the current dividend rae and at 1% below current dividends
5. Systematically notify beneficiaries and grantors of an financial downgradings
All very well and good. As for using an agent, remember this from Insurance by Black and Skipper, "A competent, informed, trust worthy insurance adviser is perhaps the consumers best insurance against making and unwise purchase decision. Regrettably, some agents and other insurance advisers, although well-intentioned, simply are not well-informed. Too often, a state agent's licensing examination is not sufficiently rigorous to disqualify those with the inadequate knowledge. Additionally, in most states, many persons who give advice about life insurance are not required by the state to demonstrate any level of professional competence in life insurance matters. The use of an unqualified adviser can result in any inadequate, poorly designed, or unnecessarily costly insurance program." Agents are woefully limited in expertise unless accompanied by a substantial background. And if you want an independent analysis, some 20 states have advisors with greater capacity overall. They suggest an adviser with a minimum of 5 years experience.
Did you hear about the bird that ate bologna and suddenly died?
It was a Tern for the Wurst.
GET OF YOUR DUFF!: (Journal of American Medical Association) Women who do at least a brisk walk every day can reduce their chances of having a stroke by as much as 30%.
RISKS: Two out of three Americans who have children do not have a current will; nearly one-third of all Americans will suffer a disability between the ages of 35 and 65; 46% of all mortgage foreclosures are caused by a disability of the homeowner (only 2% by death); approximately 30% of Americans do not carry adequate life insurance to protect their families in the event of a premature death.
A will is easy, so is basic life insurance. Disability insurance is tough to understand and expensive to boot. But a necessity for anyone with a family.
THE BASIC REQUIREMENTS OF THE DISCLOSURE OF AGENCY:
A duty of utmost care, integrity, honesty and loyalty in dealings with the agent's principal and duties of skill and care in performance of duties
Honest and fair dealing and good faith
Disclosure of all facts known to the agent materially affecting the competency or legality of said actions by the agent.
LTC: Medicaid pays for 73% of all nursing home patients days even though only 12% of the elderly are poor.
HOMES AND GROWING OLD: (AARP) As Americans grow older they want to remain in their own homes, and many say they are modifying their residences to enable them to do so. More than 8 in 10 respondents age 45 and over (including many Baby Boomers) - and more than 9 in 10 of those 65 and over - say they would like to stay where they are for as long as possible. Even if they should need help caring for themselves, 82% would prefer not to move from their current homes.
The survey of 2,000 midlife individuals also found that:
70% of those able to make changes made at least one modification to make their homes easier to live in
85% have made simple changes to their homes
67% of those making changes or modifications to their homes believe doing so will allow them to live there longer than they would have otherwise been able to - most for another 10 or more years.
REVERSE MORTGAGES: The median age of those using HUD reverse mortgages tends to be older (75) than the average elderly American homeowner (72).
Homeowners getting reverse mortgages are more likely to be single female households (56.3 %) than the average elderly American homeowners (27.6 %).
Homeowners getting reverse mortgages are slightly more likely to be African American (9.2 %) than the average elderly American homeowner (7.8 %).
The homes of reverse mortgage holders are more valuable ($107,000) than the homes of the average elderly American homeowner ($87,000).
The properties with reverse mortgages are older (41 years) than the average elderly American homeowner's home (38 years). However, the average cost of needed repairs is lower - $666 compared with $836 - as is the square-footage of the homes - 1,327 square feet compared with 1,700 square feet.
Among homeowners with outstanding balances or liens, those with reverse mortgages have a higher equity share (85.7 %) than average American elderly homeowners (69 %).
HUD's reverse mortgages seem to be used more in the West and Northeast regions of the country, with the greatest market penetration in the states of Utah, Colorado and Rhode Island and the District of Columbia.
Reverse mortgages are increasingly popular, with the share of all reverse mortgages in central cities rising from 35.2 % in 1995 to 41.3 % in 1999.
HUD's analysis of 38,000 reverse mortgages through 1999 found that only 388 of the loans ended in claims against HUD's insurance fund. Premium collections are expected to exceed claims by more than $500 per reverse mortgage, allowing HUD to build a substantial reserve against any future claims.
INVESTING: (National Center for Women and Retirement Research) "Men have inflated financial egos and I think there is a lot of bluff in the male. Women are more include to shop around to find an adviser they trust and stick with investments."
"A jury consists of twelve persons chosen to decide who has the better lawyer."
401(k) (Hewitt Assoc) 41% of total assets in larger plans are invested in employer stocks. It was 26% in 1995.
LTC: A 1995 Harvard study showed that one in five Americans over 50 were at risk of needing long term cares services within 12 months.
STROKE: One third of the people who have a stroke in the U.S. every year are under age 65.
BETTER CODES: According to Wharton professor Howard Kunreuther, approximately 25% of the $15 billion worth of insured damage in Florida alone (due to hurricanes) could have been averted had structures met existing building codes.
LIFE EXPECTANCY (UC Berkeley): Percent by which life expectancy in other nations exceeds that of the U.S.
Japan- 5%
Sweden- 3.2%
Switzerland- 3.2%
Canada- 2.8%
Australia- 2.7%
France- 2.6%
As of the year 2000, there will be 210 people age 65 and over for every 1,000 people ages 20 through 64. By 2030, the number of Americans of retirement age will rise by 69 percent to 354 for every 1,000 people of working age. And by 2075, it is projected that the figure will nearly double.
INDEXING?: (NY Times) Russ Wermers, a finance professor at the University of Maryland -- concluded that fund managers have market-beating abilities in picking stocks in that the average stock bought by a fund manager outperformed the market by 1.5 percentage points a year over the 20 years ended in 1994.
But the average fund delivered annual returns that were eight-tenths of a percentage point below the market's over that period. Taken together, the two facts mean that the average mutual fund frittered away 2.3 percentage points of return annually. The largest single source of fund inefficiency was expenses -- investment managers' salaries and administrative and marketing costs. Roughly 1.1 of the difference of 2.3 percentage points was spent on such costs. The second-largest source is the lower returns of funds' nonstock holdings. The typical fund must hold a significant amount of cash so that it can meet redemptions. Because returns on cash lag behind those of the stock market over the long term, the typical fund has weaker performance than if it had been fully invested. Professor Wermers estimated that these cash and other nonstock holdings cut the average annual return by 0.7 percentage points.
The third reason for the gap is transaction costs. Professor Wermers estimated that transaction costs of all kinds reduced performance by 0.5 percentage points or so a year. The study did not even consider front- or back-end loads, or sales charges.
I was trying to win the game of life.
Now I just try to keep the point spread down.
Thaves
DYING: (Reuters) At the end of life, many older people who are severely ill from stroke, cancer and other diseases receive PEG, or percutaneous endoscopic gastrostomy--the most widely used form of tube feeding. But researchers at the Indiana University Center for Aging Research in Indianapolis indicate that such tube feeding does not improve the nutrition or overall health of severely ill older people and may be more for the convenience of caregivers and financial decisions. It may be easier for family members to deal with a loved one's death if they know that he or she received adequate nutrition until death, according to the researchers. They note, however, that the flip side of this argument is that tube feeding may only prolong a person's suffering.
They concluded 'We do not have any information that makes us think your loved one will live longer or be more comfortable or functional if we do this procedure. We do know that if the PEG is placed, there is a very high chance that he/she will die soon.''
"Laziness is nothing more than the habit of resting before you get tired."
Jules Renard
SO YOU WANT TO TRANSFER ALL YOUR ASSETS IN ORDER TO QUALIFY TO DIE IN A MEDICAID WARD????: (McKnight's Long-Term Care News) "88 Massachusetts nursing homes with a total of 10,208 beds have sought bankruptcy protection in the last year due in large part to low Medicaid reimbursements. This represents more than 15% of the state's nursing homes and more than 17% of its beds. In the past four years, Massachusetts facilities have lost $77 million.
Medicaid covers the cost of care for seven out of ten Massachusetts nursing facility residents, but less than one in four facilities receives enough money to cover the cost of care, according to the Massachusetts Extended Care Federation."
AND MORE- NURSING HOMES: Congressional investigators have found widespread violations of federal health and safety standards at nursing homes in Texas, New York, New Jersey, Illinois and California. The investigators found "serious deficiencies" in about 70 percent of nursing homes in Texas. In separate reports, they found similar problems at 40 percent of nursing homes on Long Island and in central New Jersey, and at more than half of the homes in Chicago, Los Angeles and the San Francisco Bay Area. About 1.6 million people receive care in 17,000 nursing homes nationwide. Medicaid pays for the care of two-thirds of the patients.
The average Texas Medicaid payment is a little over $82 a day for 24 hours of nursing care and attention," said Texas Health Care Association. "That works out to less than $4 an hour. It's just not adequate." Nationwide, state Medicaid programs paid homes an average of $103 a day last year. The average in New York, $174 a day, was more than twice the average in Texas."
INVESTING: Jonathan Clements of the WSJ had some comments about how investment contradictions abound. He mentioned 25 ironies. I'll add some commentary
1. Because there are so many savvy players in the market, who together ensure that shares tend to be fairly priced, smart investors find it hard to do really well and ignorant investors find it tough to do really badly.
Of course some people do well and some badly, but the point is that investors can't pick stock anyway. For those that do well, was it luck or skill? As yourself this- was Lynch good? Surprise- you don't know. It would have taken another 70 years to know with a 95% degree of accuracy whether his returns were due to luck or skill. However, statistics have also borne out that a bad fund tends to stay bad.
2. Investors who are most confident of their skill, and thus tend to trade the most, often get the worst investment results because of the trading costs they incur.
It isn't just the costs- which have gone down overall due to Internet trading. It's the taxes for short term gains. Further, read any solid text on market timing and you will find that it doesn't work on a consistent basis. You also need to read the articles by Barber and O'Dean regarding investor confidence.
3. You are more likely to outperform other stock investors if you give up trying and instead buy a market of market matching index funds.
Normally true- but the key is WHICH indexes do you use and when. The issue is asset allocation which I have addressed extensively.
4. The best way to get rich is to buy one stock and hope it's a 20 bagger. But its also the one most likely to end up poor.
You must know this an an investor- how many stocks must you have in order to insulate a portfolio from unsystematic risk? If you do not know this- you should not buy stocks.
5. In inefficient markets, stocks will be mispriced. But if you try to take advantage of these opportunities, you may trail the market because trading costs in inefficient markets are often extraordinarily high.
There are some inefficiencies- but most are traded away quickly. Secondly, I doubt most people have the background to properly spot an inefficiency anyway.
6. Adding a risky investments like international stocks can reduce the overall portfolio's risk.. That's because foreign stock may tread water or climb when your U.S. stocks are tumbling, thus damping your portfolio's volatility.
True- but why not use gold instead. After all, it was one of the best investments years ago. Why not use Japan. Why not use a Pacific rim fund. Why not add Europe with a poor Euro. How about Latin America for the last few years. It is true that they might dampen volatility since the correlation is offsetting to some degree. True, you can slow down the standard deviation and end up with terrible investment returns in doing so. Even a small furry animal could have seen what was happening 5+ years ago and opted for a 500 index. Sure you may have had more volatility but you made some money that was easy to spot. Staying the course when you are sailing into rocks is illogical.
7. The more successful an actively managed stock funds is, the more difficult it is for that performance advantage to persist because of the influx of new money from.
They get bloated- that's why you saw so many funds stop accepting money for months- even years- since they could not find the bargains they wanted.
8. By the time you are confident that a money manager is truly skillful, his career may almost be over.
I have already addressed Lynch. Same thing most recently with Vinik. Maybe even Buffett is doing a reversion to the mean. It does NOT mean they are bad or even will be. But put the numbers into perspective and recognize what reversion really means.
9. The most discussed investments tend to have the lowest returns. Popular assets get their prices bid up, lowering subsequent returns
True. The reference is to buying high/selling low
10. A stock market tumble might be unpleasant. But for many folks it is the better alternative. After all,, if you are still adding fresh savings, wouldn't't you rather buy at cheaper prices
Sorry, problem here, specifically in the use of individual stocks. Take a real life scenario with my brother in law. He worked at Digital and bought stocks through a company plan. $33 a share, $75 a share all the way up to $200 a share. The value at the date of his death had steadily dropped to $54 and it subsequently went to $16. Or take 1973 and 74. You could have continued to buy securities as the market dropped by over 45%. Sure it went back up. But it took over 12 years to break even with what you could have been done with Treasuries. If you continue to invest in a terrible economy or in a poorly managed company, you are apt to get screwed. Sometimes they NEVER come back up. For example Digital was sold.
11. When stocks price plunge, all the talk is of panicky investors dumping millions of shares. But every one to those shares is bought by somebody.
My point always goes to national and international economics. If it looks solid, perhaps you stay put. If mediocre, perhaps change the mix. If its 1973/74, sell. Of course somebody might buy those shares- but they are the ones being stupid.
12. The market's performance each year is driven by a handful of high flying stocks. But instead of trying to pick those stocks, you should diversify. If you try to select the few big winners, the odds suggest you will end up owning the clunkers and thus lagging far behind the market averages.
Solid information
13. Investors with long time horizons fret endlessly about daily performance
I don't quite follow this comment. Actually, its just the opposite. You are looking out from 6 months to several years. Now someone might say that 6 months is a very short time frame- and I would agree. But I am always cognizant that something may go wrong or that some opportunity might arise as new monies are invested. You need to be vigilant.
14. If you buy stock gradually, rather than all at once, you reduce risk. But if you sell a stock gradually, you take more risk that somebody who dumps his shares in one fell swoop and thereby eliminates exposure to the stock.
What has been missed by almost everyone is that DCA- Dollar Cost Averaging- also reduces return. It has not worked, does not work today and universally will not work into the future. You earn more money by investing all at once. But the issue still is not fully identified. If you are investing in a bad economy- take this year for example- why? I am not saying there might not have been periods when the adversity of the national market abated where money might have been invested (midyear), but then right after we have the mid east mess and the oil "crisis". Why would a reasonable investors invest in that type of instability? I think purchases of funds INCREASED risk because you were almost assured of a loss.
And just what is meant by investing your lump over time? Is the time frame 6 months? One year? 5 years? I suppose one could say that if you don't have a clue to investing, DCA reduces risk. By the same token, somebody using DCA is NOT an investor and really doesn't have much of a clue to what is going on anyway.
15: The rich are the most able to bear market risk, but have the least need to do so.
Fine- if you have lots of money that will absolutely last you a lifetime+, there is no need to take excessive risk. You already have all the money you need and a conservative position is valid
16. As investors grow older, the gain experience and they usually become more comfortable with stock investing. But by then, they have less time to reap the benefits of their wisdom.
Well, I know I will turn some people off, because this wisdom does NOT include the fundamental knowledge of investing since it still hasn't been taught to just about anyone. I repeat, if you do not know the numbers for diversification, you are not an investor.
17. Younger investors can profit from long run returns but often are the least able to save.
Younger people- particularly starting a family- are absolutely deluged with basic bills. It's tough.
18. In the U.S. , we have the most heavily regulated markets in the world, and yet they're the most liquid and the most open. This is one case where government regulation stimulates market development
Agreed
19. The 15% income tax bracket may be a nice place to visit, but you wouldn't necessarily want to live there
Agreed
20. If a bond defaults on its interest payments or a stock cuts its dividends, that is almost always bad news. But if the annual distribution from a stock or bond fund shrank, often that is a sign of prudent money management.
Not sure what he is referring to. If one fund distributes 5% and another, with exactly the same portfolio, only pays our 3%, what is the inference??
21. Zero coupon bonds- the most volatile of bonds- offer great long term certainty because you know exactly what return you will get if you hold to maturity.
The reference is to regular bonds with calls dates. If bonds are called, you run into the problem of the risk of reinvestment - usually at lower rates.
22. The longer you hold an investment, the less erratically it performs as the bond gradually approaches maturity. But if a bond funds volatility typically remains the same, not matter how long you hold it.
That's primarily because there are no maturity dates with funds. Though you can look at duration.
23. The most profitable companies tend to have the lowest returns goin forward. Highly profitable firms attract competition, amass cash that's used for unwise acquisitions and, in general, become, fat dumb and happy.
Fine
24. By refusing to pay dividends, companies encourage shareholders to be disloyal, because the only way investors can get cash back is to sell shares.
Acceptable, but many investors reinvest dividends anyway. Secondly, most people buying stocks look for appreciation and may forego dividends
25. The best time to buy cyclical stocks, like autos, paper steel and heavy equipment manufacturers is when they have no earnings. The best time to sell is when they are making plenty of money
WIDOWS About 60 percent of elderly poor women are widows.
VIOLENCE: By the time a child exits elementary school, they have witnessed 100,000 acts of violence including 8,000 acts of murder through TV and in films.
ILIT: Trust and Estate magazine indicated that over 80% of all Irrevocable Life Insurance Trusts contain the wrong type of life insurance. Absolutely true. But the incompetence of financial planners, life insurance agents, trustees, attorneys and Your Mama in regards to an understanding of life insurance basics is clearly the problem. As long as you use people based solely on trust, sooner or later you will get screwed.
HMO FINANCIAL STABILITY (FSO)- According to a study of 572 HMOs by Weiss Ratings, 11 of them have failed to meet the guidelines recently adopted by the NAIC for the minimum capital level needed to maintain financial stability. Another 78 HMOs were deemed "very weak" financially by Weiss, with an additional 162 HMOs considered "weak."
HEALTH COSTS: Hewitt Associates is predicting that 2001 will mark the third consecutive year that U.S. employers will be hit with major health care cost increases. They predict increases of 10 to 13% with a projected annual cost of $4,707 per employee. Major drivers: prescription drug costs and the pressure to produce improved bottom line results.
I COULDA TOLD YA: (FS News) A new study co-authored by a DePaul University professor confirms what many investors have long believed: investing in low-priced stocks traded on the Over the Counter Bulletin Board (OTC-BB) is risky. Surprisingly, however, the study also found that the high risk did not bring higher returns. In fact, over the four years studied, a portfolio of OTC-BB securities was more volatile and yielded lower returns than comparable portfolios of Nasdaq, NYSE, American Stock Exchange and S&P 500 Index securities.
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